Value’s Momentum: $15 Billion Quant ETF Goes from 2% to 32% in Financials

Some of the most common questions we hear from advisors today are “Can the outperformance of value stocks continue?” and “How long might the outperformance last for?”

While we have authored multiple blog posts over the past few months discussing the impact of the economic recovery and higher interest rates disproportionately benefitting value stocks, another interesting aspect unfolding is the recent adoption of value stocks by momentum strategies.


A striking example of this phenomenon is the semiannual rebalancing of the iShares MSCI USA Momentum Factor ETF, which took place in late May. Prior to the rebalance, financials represented just 1.6% of the fund, whereas post-rebalance, as of June 10th 2021, financials are its most heavily-weighted sector, representing over 32%. Information technology’s weighting fell from over 40% to roughly 17%. 

The index which this ETF tracks, the MSCI USA Momentum Index, takes into account a stock’s most-recent 12-month and 6-month price performance. The outperformance of financial stocks – particularly large banks – over these time frames resulted in the Index’s model rewarding these companies with outsized position weightings. JPMorgan Chase, Bank of America and Wells Fargo all landed in the fund’s top-ten holdings.

This is a significant development because momentum is a commonly used factor, not just by quantitative and “smart beta” funds, but also by fundamental stock picking investment firms that use factor-based models for up-front screening and rankings. As traditionally value-oriented sectors like financials continue to benefit from strong underlying economic tailwinds, their stocks are being further aided by asset flows and multiple expansion. The momentum we’ve seen recently could likely continue feeding upon itself and contribute to an extended period of outperformance.

Source: Prospector Partners


Disclosure: The discussion of individual companies should not be considered a recommendation of such companies by the Fund's investment adviser.


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