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Momentum portfolios continue to flounder

It’s nearly a year since market dislocations prompted us to ask whether factor exchange-traded funds (ETFs) were still fit for purpose. Now, with a regime change possibly on the cards, another look should mainly give cause for hope.

What’s nice to see is that minimum volatility funds have proved useful in the rocky six months to 9 May 2022. If we look at the iShares Edge factor products focused mainly on global, US and European markets, minimum volatility funds have held up well. The iShares Edge S&P 500 Minimum Volatility UCITS ETF (MVUS) returned 4.7 per cent versus a 6.2 per cent loss for the S&P 500 index.

The fund has had much less exposure to the US tech majors than an S&P 500 tracker, with bigger allocations to the likes of healthcare and consumer staples. A European minimum volatility fund from the same range is down by 6.5 per cent – not ideal but much less painful than the 12 per cent loss on a conventional MSCI Europe ex-UK ETF.

Other single-factor funds are doing as expected, with value leading and quality struggling. But what’s notable is how poorly momentum portfolios have done. For example, iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMF) has lost around 15 per cent in six months, much worse than the 5 per cent loss for a standard MSCI USA ETF. While the two funds vary by their specific holdings within sectors, one notable difference was that the momentum fund had a much bigger financials weighting.

A flaw in the momentum offering remains, in that these ETFs only rebalance twice a year, usually at the end of May and November. That leaves names such as IUMF struggling to chase market rotations – and investors keenly awaiting the next rebalance.