iShares Edge MSCI USA Momentum Factor ETF (MTUM)

I really got interested in investing in the late 1990's, when tech stocks were on a seemingly endless elevator going up. I invested in a technology mutual fund that made over 100% in one year; then over the next couple of years it would make a run of 25% or so, only to give the gains right back. There was so much excitement over the internet that any company that ended in .com was lavished with attention, and more importantly, money. Eventually, the elevator returned to earth with a crash. 

Yahoo! is a good window into this story. The stock went from $33 at the end of its first day trading to $475 a share over just 4 years (1996-2000). By the end of September 2001 the stock price was below $9. Buying a hot stock and then holding it long-term can be a very dangerous approach. But what if you bought it sometime during its early strength, rode it for a while, and then sold it as it lost its momentum?

iShares Edge MSCI USA Momentum Factor ETF (MTUM) is an investment that does just that: buys the hottest stocks from the MSCI USA Index, which is a little over 600 stocks, mostly large caps. The fund is a "Smart Beta" index that builds the portfolio by selecting 125 stocks that exhibit the highest price gains over the last 6 and 12 months. Here is a link to the index which the ETF tracks:

MSCI USA Momentum Index

The fund is about 36% invested in technology and about 20% in financial stocks. The index that I linked to above has a history back to 2004. There is also a paper that provides some other interesting stats about momentum here:

MSCI Factor Focus: Momentum

I've always been of a contrarian nature, but a consistent application of momentum combined with a value strategy (buying the least popular stocks), is actually very effective. Like any strategy, you have to be able to stay with this kind of investment even when it goes through dark periods. There are times when momentum stocks will get hit the hardest, and you may be tempted to bail out. However, they can also have the biggest bounce when things begin to recover.

MTUM is a good way to implement a disciplined momentum strategy without having to do all the legwork of choosing individual stocks. As an all-stock fund, this fund could lose as much as 50-60% during a full bear market crisis.