Despite the Covid-19 pandemic wreaking havoc on the capital markets in 2020, the ETF industry showed its ability to not only weather the storm but to prosper in spite of it. Factor-based funds were also winners, which puts funds like the iShares Edge MSCI USA Momentum Factor ETF (MTUM ) and the iShares Edge MSCI USA Value Factor ETF (VLUE ) in the spotlight.
“It was a year of ETF records,” wrote Ben Johnson in a Morningstar article. “New records were set for total flows; flows into bond ETFs; flows into environmental, social, and governance ETFs; and flows into active ETFs. There was a record number of new ETFs launched, and a record number of ETFs closed.”
The story of factor-based funds wasn’t just isolated to the typical growth versus value story. Speaking to the latter factor, VLUE was trading at a discount while MTUM was trading at a premium when compared to Morningstar’s estimates of value.
“The spread of valuations among strategic-beta ETFs representing a variety of individual factors speaks to the themes that defined stock markets in 2020,” wrote Johnson. “At year-end, after falling 0.32% over the preceding 12 months, iShares MSCI USA Value Factor ETF (VLUE) was trading at an 9% discount to its Morningstar fair value estimate. It finished October trading 21% below its fair value. On the other hand, iShares MSCI USA Momentum Factor ETF (MTUM) gained 29.69% in 2020 and closed the year at a 32% premium to its fair value estimate.”
Tracking Momentum With MTUM
MTUM seeks to track the investment results of the MSCI USA Momentum Index. MTUM generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
As far as the index goes, it consists of stocks exhibiting relatively higher momentum characteristics than the traditional market capitalization-weighted parent index, the MSCI USA Index, which includes U.S. large- and mid-capitalization stocks.
Finding Value in VLUE
On the other hand, VLUE seeks to track the investment results of the MSCI USA Enhanced Value Index composed of U.S. large- and mid-capitalization stocks with value characteristics and relatively lower valuations. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
The index is based on a traditional market capitalization-weighted parent index, the MSCI USA Index (the “parent index”). The parent index includes U.S. large- and mid-capitalization stocks.
