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What Would Adding MTUM Do to Your Portfolio?

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Nov. 13 2015, Updated 8:07 a.m. ET

The characteristics of a momentum ETF

The iShares MSCI USA Momentum Factor ETF (MTUM), which tracks the MSCI USA Momentum Index, selects stocks for its portfolio that exhibit high momentum in the market. Momentum is the rate of acceleration of a security’s price or volume. It’s a basic technical oscillator to identify a trend in the market.

MTUM’s current year-to-date (or YTD) return is 7.9%. Momentum portfolios are generally high-risk with great potential for return. The graph below shows the effect of adding MTUM to a portfolio.

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Momentum effect

It’s clear from the above graph that the SPDR S&P 500 ETF’s (SPY) performance has typically lagged the combined portfolio of 20% MTUM and 80% SPY. The YTD return of the combined portfolio is 4.5%, which beats the market YTD return of 2.7%.

The volatility of the combined portfolio has also increased the overall risk of the portfolio. MTUM’s top holdings include stocks such as Facebook (FB), Visa (V), Nike (NKE), Eli Lilly (LLY), and Alphabet (GOOGL).

Conclusion

Momentum portfolio ETFs have been one of the most traded ETFs in the market. MTUM has performed strongly in the market due to its strong stock selection model and earnings of its major sector components. But momentum stocks also increase the overall risk of a portfolio. So investors should consider their risks before investing in these funds.

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