Momentum investing has been one of the most significant investment trends of the past several years. Often associated with the meme stock phenomenon of 2021, momentum investing has become a popular strategy among many retail investors.
Two of the most popular ETFs catering to momentum investors are the iShares MSCI Momentum Factor ETF (MTUM) and the JPMorgan U.S. Momentum Factor ETF (JMOM), but between the two, which is best?
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What Are Momentum ETFs?
Momentum ETFs are funds based around the concept of momentum investing. This approach to investing is based on the assumption that trends in both the broader market and individual stocks tend to be persistent and that investors can profit by riding the wave of ongoing trends.
For example, a stock that is rising rapidly may continue to do so, allowing even investors who pay more than the stock’s intrinsic value to profit from continued upward momentum.
In order to capture current trends in the market, momentum ETFs combine a large number of stocks that demonstrate higher-than-average momentum.
Generally, these funds begin by calculating momentum as the 12-month return of a given stock with the previous month excluded.
From there, additional selection criteria such as market capitalization and volatility can be applied when determining the stock’s weight within the portfolio.
Every fund uses different criteria and assigns weighted value differently, but the core idea is always to find a subset of stocks displaying rapid price growth trends.
Risks of Momentum Investing
While momentum investing can produce positive results, it’s also important for investors to understand the risks associated with it.
The most critical of these is the fact that momentum investing does not take into account the intrinsic value of stocks as determined by discounted cash flow analysis. This valuation method, which holds that the value of a business is a function of its future cash flows discounted to reach a net present value, is a cornerstone of traditional investing.
Momentum investing largely ignores this based on the assumption that stocks can display high levels of momentum long after they have surpassed their intrinsic values. As such, investors who rely heavily on momentum strategies are prone to overpaying for their stocks.
Because it requires entering and exiting stock positions at favorable points, momentum investing is also somewhat reliant on technical analysis.
This form of analysis, which attempts to find and predict patterns in stock price charts, is quite controversial in the investing world. Many critics question the effectiveness of technical analysis, arguing that it often runs counter to the more widely accepted efficient market hypothesis.
On the other hand, one of the best traders in history, Stan Druckenmiller, who famously never had a down year, incorporates technical analysis into his process based on the assessment that markets are not always efficient.
In addition to the basic risks of the momentum strategy, momentum ETFs come with their own challenges. Because it can take several months for ETFs to be rebalanced, these funds can miss momentum trends or stay on old ones that are no longer continuing. This can make it difficult to translate the highly active momentum strategy into the context of a large fund.
What Does MTUM Track?
MTUM tracks a portfolio of 124 large and mid-sized US companies. The stocks held in the portfolio are selected based on their relatively high momentum.
As of the time of this writing, the top 5 holdings in the MTUM fund are as follows:
- NVIDIA (NASDAQ:NVDA)
- Meta Platforms (NASDAQ:META)
- Eli Lilly (NYSE:LLY)
- Microsoft (NASDAQ:MSFT)
- Exxon Mobil (NYSE:XOM)
What Is the Average Annual Return of MTUM?
Since its inception, MTUM has averaged an annual return of 12.02 percent.
In total, investors who bought when the fund first launched in April of 2013 have seen a return of 218.69 percent.
Is MTUM a Good Investment?
While it’s undeniable that long-term MTUM investors have made a fairly attractive annual return, it’s important to consider the fund’s performance in the context of the broader stock market.
Since the month of MTUM’s launch, the benchmark S&P 500 index has averaged a return of 12.67 percent, counting dividend reinvestments.
By this standard, MTUM has very slightly underperformed the overall stock market.
Is JMOM a Good Investment?
Since its launch in November of 2017, JMOM has returned an annual average of 10.98 percent.
With dividends reinvested, the S&P has returned 11.75 percent over the same period.
So, like MTUM, JMOM has produced respectable returns for investors but has underperformed the stock market as a whole.
Does JMOM Pay Dividends?
JMOM pays an irregular dividend each quarter.
The most recent quarter’s dividend, payable on September 22nd, is $0.12 per share.
The fund’s 30-day yield is currently 1.16 percent.
JMOM vs MTUM Expense Ratios
When it comes to expenses, JMOM slightly beats out MTUM.
JMOM’s current expense ratio is 0.12 percent, compared to 0.15 percent for MTUM.
JMOM vs MTUM Track Records
MTUM has been in existence about four and a half years longer than JMOM. With that said, both funds have been around long enough to produce long-term performance data.
Examining their performance since inception, MTUM seems to emerge as the long-term winner between the two funds.
MTUM has beaten out JMOM’s lifetime annualized returns by an average of more than 1.0 percent.
This view, however, becomes far less clear on a shorter time horizon. In the last five years, for example, JMOM has averaged a 9.65 percent return, while MTUM has returned just 7.06 percent.
In the past three years, the funds earned 7.80 percent and 4.53 percent, respectively.
The past 12 months have seen JMOM return 12.63 percent, while MTUM returned just 8.36 percent.
JMOM vs MTUM Assets Under Management
Despite their seeming similarities, MTUM dwarfs JMOM in terms of assets under management.
MTUM currently amounts to $8.55 billion, compared to just $294.6 million for JMOM.
Which Momentum ETF Is the Better Investment?
Deciding between JMOM and MTUM isn’t as straightforward as it may appear on the surface. Despite vastly greater holdings and a higher lifetime average return rate, MTUM’s lower recent returns call its apparent advantage into question.
MTUM also charges a slightly higher expense ratio that may make it less attractive to fee-sensitive investors.
JMOM appears to be a somewhat better way to track momentum stocks than MTUM. Even though MTUM has a higher lifetime compounded growth rate, the return rates for the last one, three and five years all strongly favor JMOM.
This difference appears to be due to the composition of the two funds’ portfolios. JMOM includes some 298 holdings, compared to the 124 tracked by MTUM. This fact automatically gives JMOM an edge when it comes to diversification and may help to mitigate the risks posed by any one stock.
JMOM’s weighting also seems to reduce its exposure to the most volatile stocks. For example, NVIDIA makes up just 1.8 percent of JMOM’s portfolio, compared to 6.5 percent in MTUM’s.
Ultimately, JMOM has performed better than MTUM for several years and appears to be doing a better job of managing the risks associated with momentum investing. The bottom line is it seems that JMOM is likely the better choice for those interested in momentum ETFs.
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