The excitement around artificial intelligence that sent Nvidia and a few other tech stocks soaring in the first half 2023 happened so quickly that a massive momentum fund is now playing catch-up. The biggest momentum ETF, the iShares MSCI USA Momentum ETF (MTUM) , rebalanced in the final days of May and now has Nvidia as the biggest holding in its portfolio, at about 6.3%. However, the fund only rebalances twice a year, which means that it is late to the party for the AI stock. According to FactSet data, MTUM did not even have Nvidia in its portfolio before May, while having large weights in energy stocks such as Exxon Mobil and Chevron that have underperformed this year. The fund, which has about $9 billion in assets, has lost -5.7% on a total-return basis in 2023. MTUM YTD mountain The biggest momentum ETF has struggled in 2023. “With momentum, because you are buying the stocks that are up the most, if you do it at a random time — which MTUM seemingly is — there is huge risk you miss out on a large chunk of a move or you’re holding on to losers way too late. Momentum is very time sensitive,” said Strategas ETF strategist Todd Sohn. How the index works The MSCI USA Momentum Index attempts to capture hot stocks, with the hope that their rally will continue over the coming months. MSCI uses a combination of six- and 12-month price momentum metrics to create a momentum score for stocks, according to the firm’s methodology document . The MSCI USA Momentum Index is rebalanced every six months, with the most recent update taking effect on June 1. The MTUM fund follows a slightly altered version of the index that rebalances over the course of several days ahead of the effective date. MSCI researchers Abhishek Gupta and Roman Mendoza said in a May 23 note that the momentum index saw a larger than average turnover this time, at 67%. Nvidia, Meta Platforms and Microsoft were all added to the index with a 5% weight, which is the maximum amount allowed by the methodology. “In short, the index will do what it is designed to do: rotate out of securities that have underperformed recently and into those with recent outperformance,” the note said. There are other momentum funds with different methodologies that rebalance more frequently, such as the Invesco DWA Momentum ETF (PDP) and the Alpha Architect U.S. Quantitative Momentum ETF (QMOM) , that have outperformed MTUM this year, but those two funds are still trailing the S & P 500. With stocks still trying to pull out of a bear market, this may not be the best environment for momentum, according to Strategas’ Sohn. “The broader market does matter to some extent. Yes, we’re up off the low, but we’ve been in a challenging environment for the last year and a half. When you have a strong bull market, like a 2013 or even a 2016-17, that’s when momentum really works well because people are just buying stocks left and right. This is a little bit more tricky,” Sohn said.
