Momentum is a style factor which seeks increased exposure to companies that are outperforming and decreased exposure to companies that are underperforming.
iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.
iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.
Find out more about iShares MSCI World ex Australia Momentum ETF (IMTM)
https://www.blackrock.com/au/products/335486/
This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years with high to very high risk/return profile.
Momentum, like all our factor investing options has been a persistent and historically rewarded factor. Each of the factors that we believe in at BlackRock have an underlying economic rationale, empirical support for positive expected returns and/or reduced risk, are diversifying to other well-known style factors, and can be efficiently captured in live portfolios.
The phenomenon behind momentum is probably best explained by behavioural finance theories. Momentum exists because of investors’ behavioural biases—the action of individual investors tends to exacerbate market trends, and some investors only gradually adjust their beliefs to new information. Momentum premiums can also result as a reward for bearing risk—the risk of being whipsawed and short-term underperformance—that others are not willing to bear. Momentum occasionally undergoes short term crashes—like 2001, 2009, and 2023—and there is a long-run momentum premium to compensate investors for bearing potential short-term cyclical losses.
In our opinion, both the risk-based and behavioural-based explanations have merit. More importantly, we believe both economic rationales will continue going forward which helps give us conviction that momentum will persist in the future.1
Source: MSCI as of Dec. 31, 2023.
Past performance is not a reliable indicator of future performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Material differences may exist between indexes being compared, such as investment strategies, and countries or markets covered.
The momentum index takes into consideration the relative risk-adjusted performance of each stock over the past 6 months and 12 months. Once identified, the top 30% of the parent universe with the strongest momentum exposure is selected (subject to some constraints – see below).
| Metric | Objective |
|---|---|
| 6-month risk adjusted price momentum | Measures the price momentum of each stock in the parent index over the past 6 months adjusted for risk |
| 12-month risk-adjusted price momentum | Measures the price momentum of each stock in the parent index over the past 12 months adjusted for risk |
Source: BlackRock, MSCI
Unlike our other single factor funds, momentum is the only factor where sector constraints are not applied. Academic research2 has found momentum at the security level, industry/sector level, and at the asset class level; therefore, when capturing momentum in a portfolio, it is important not to constrain sectors.
It is however important to consider the diversification of the momentum portfolio/index, as an overconcentration in single stocks can lead to large idiosyncratic risk. To reduce stock specific risk, the underlying index applies individual security caps to mitigate some of this risk.
The MSCI Momentum Indexes are rebalanced on a semi-annual basis, usually as of the close of the last business day of May and November3.
The methodology has several tools to seek to capture newer price trends, rather than just looking at trailing 12-month returns which is common in much of the research on the momentum factor, the underlying index also uses a shorter-term 6-month risk-adjusted price signal to theoretically capture trends earlier. The rebalance frequency for this index was given thoughtful consideration regarding the trade-off between trading costs and more frequently adjusting the exposure (rebalancing) to capture changes in the momentum factor.
The index has built in flexibility to have conditional/ad-hoc rebalances intra-rebalance period. As momentum is a "faster-moving" factor, the index has the additional ability to rebalance between these 6-month periods based on levels of volatility in the market. This last occurred during the COVID pandemic in 2020 and allowed our US based momentum ETFs to capture the changing trends.
The momentum factor has shown a higher reward/risk ratio and delivered more consistent outperformance over its counterparts over 3-yr, and 5-yr rolling periods. Not surprisingly, the economic intuition and empirical evidence has caused many to become momentum investors
As shown below, the momentum factor’s reward-to-risk ratio is almost double the small size premium and approximately 1.5 times larger than the value premium. Additionally, it’s provided “more bang for your buck” than the broad equity market. Historically, momentum has had higher volatility than size, value, and quality, but momentum has provided the highest risk-adjusted returns.
Momentum has provided the highest risk adjusted returns Reward to Risk Ratios, July 1963 – July 2023.
Source: Ken French Data Library. Data as of July 1963 – July 2023. Equity market represented by RMRF (Mkt minus Rf). Size represented by SMB (small minus big). Value represented by HML (high BTM minus low BTM). Quality represented by RMW (robust minus weak). Momentum represented by MOM (high prior minus low prior). A higher ratio implies greater returns per unit of risk. Risk calculated as annualized standard deviation.
The table below shows persistence in momentum when examining rolling returns over various periods. Historically, the momentum factor has delivered more consistent outperformance relative to its counterparts over monthly, 1-yr, 3-yr, and 5-yr rolling periods. Over 10-year rolling periods, momentum is approximately in line with broad equities, and modestly less persistent than quality.
Momentum has provided persistent historical outperformance hit rates for Factors July 1963 – July 2023.
Source: S Ken French Data Library. Data from July 1963 – July 2023. Past performance is not a reliable indicator for future performance.
Previously, active investment managers used teams of analysts to identify stocks with price momentum in an attempt to outperform their peers. Advances in technology have given investors additional ways to systematically identify stocks that are outperforming relative to the market.
Accessing momentum through low-cost ETFs such as iShares MSCI World ex Australia Momentum ETF (IMTM) allows investors to looking to capture the higher expected returns of investing in the factor style - with an understanding that there is long-term empirical data supporting the factor style, as well as academic theory and economic rationale that support it.
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1Any opinions represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results.
2“Do Industries Explain Momentum” by Moskowitz and Grinblatt (1999) and “Understanding the Nature of the Risks and the Sources of the Rewards to Momentum Investing” by Grundy and Martin (2001).
3MSCI
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