Morningstar - Q4 2020 - 60

0.5
Strategies

10/2000

0

10/2004

10/2008

10/2012

10/2016

EXHIBIT 2

Actual Momentum Funds Disappoint (in Real World) Momentum funds have
a wide range of strategies, which is exhibited by their varied performance relative
to the Russell 1000 Growth Index. None outperformed the index.
3-Year

5-Year

Annualized Return

Russell 1000 Growth Index

30%
25
20
15
10
5
0
0%
2
4
6
Tracking Error to the Russell 1000 Growth Index

8

10

12

14

Source: Morningstar Direct. Data as of 08/31/2020.

how much they benefit when that factor pays off.
Among these is SPDR Russell 1000 Momentum
Focus ETF ONEO. This fund starts with the Russell
1000 Index and adjusts its weightings to favor
stocks with strong quality, low valuations, small
size, and strong momentum. While the fund
places the greatest emphasis on the momentum
adjustment, it has very weak exposure to the
classic momentum factor. That's partially because
its value and small size tilts tend to favor
stocks with poor momentum, which offsets its
momentum tilt. Quality stocks may not always
have strong momentum.
Morningstar's factor profiles (available on each
fund's portfolio tab on Morningstar.com)
offer an easy way to compare exposures to the
classic momentum factor. They show how
a stock fund's factor exposures rank relative to
the universe of U.S.-listed funds, based on
its current holdings. The following table illustrates
the momentum exposures for these ETFs from
their factor profiles.
Momentum Factor Profile

Invesco S&P 500 Momentum ETF achieves strong
exposure to the standard momentum factor,
despite rebalancing only twice a year and applying
buffers to mitigate turnover. It does this by
narrowly focusing on the quintile of stocks in the
S&P 500 with the strongest risk-adjusted
momentum over the past 12 months, excluding
the most recent one. It further strengthens
this exposure by weighting stocks according to
both the strength of their momentum and
market capitalization.
This risk adjustment points the fund toward
stocks whose momentum is more likely to persist
and reduces its exposure to cyclical stocks
during market rallies, which tend to get hit harder
than most during market downturns. This
should improve performance when the market
turns, though it isn't a panacea.
IShares Edge MSCI USA Momentum Factor
ETF takes a similar approach to Invesco S&P 500
Momentum ETF. Like its peer, the iShares fund
attains strong exposure to momentum by

60

Morningstar Q4 2020

casting a narrow net around momentum leaders
and incorporating momentum strength into
its stock weightings. It uses a longer three-year
lookback period to measure risk than than its
Invesco counterpart. It favors stocks with strong
returns over the past seven and 13 months
(excluding the most recent one), relative to their
longer-term risk. This is less about momentum
quality than it is about reducing the portfolio's risk.
However, the two funds have exhibited similar risk.
Similar to Invesco S&P 500 Momentum ETF, iShares
Edge MSCI USA Momentum Factor ETF refreshes
just twice a year and applies buffers to mitigate
unnecessary turnover. Spikes in market volatility
can trigger off-cycle rebalancing, during which the
fund focuses only on its shortest-term performance
signal. This should help by allowing the fund
to use the most recent returns available, which are
more likely to persist when market conditions are
changing than older data.
Not all momentum funds deliver potent exposure
to the classic momentum factor, which limits

Momentum
Exposure Percent
Ranking (%)

Invesco S&P 500 Momentum ETF
SPMO

10.7

3.7
iShares Edge MSCI USA
Momentum Factor ETF MTUM
					
51.7
SPDR Russell 1000 Momentum
Focus ETF ONEO
Source: Morningstar Direct. Data as of 08/31/2020.

Factor strength alone isn't the end goal. Potent
factor exposures often come with high risk.
However, this can be a helpful tool to
gauge whether a fund is delivering the exposure
it targets. If a fund delivers strong exposure
to momentum while mitigating turnover, risk, and
fees, it has a good chance to succeed. K
Alex Bryan is the director of passive strategies for North
America and editor of Morningstar ETFInvestor.
http://www.Morningstar.com
Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020
