Momentum Stocks Roar Higher In 2020 Start For Equity Factors

The year is still young but so far there’s a clear winner in the horse race among US equity factors: momentum. Following a mostly meandering performance in 2019’s fourth quarter, large-cap momentum has been on a nearly non-stop rally in the new year that’s left the rest of the field in the dust, based on a set of ETFs representing factor strategies in the US equity market.

The iShares Edge MSCI USA Momentum Factor (MTUM) climbed 5.2% year to date through yesterday’s close (Jan. 21). The gain is well ahead of the second-best factor performer–iShares S&P 500 Growth (IVW), which is up 4.7% so far this year. MTUM’s performance edge widens further vs. the remaining factor funds on our list.

Some market observers argue that a shift away from momentum is unfolding. A JP Morgan analyst, for instance, last week advised that investors are rotating out of momentum into value stocks. Perhaps investment flows tell the story, but at the moment there’s little evidence of the transition to value in the year-to-date returns for our set of proxy ETFs.

Indeed, the large-cap value factor–based on iShares S&P 500 Value (IVE) – is currently up a slight 0.9% so far in 2020. Mid- and small-cap value funds are posting even softer results, including the only year-to-date decline in the factor space at the moment: iShares S&P Small-Cap 600 Value (IJS), which has slipped 0.7%.

For comparison, the US stock market overall is up a strong 2.9% so far in 2020, based on SPDR S&P 500 ETF (SPY).

The impressive run in momentum stocks worries some analysts, who argue that this factor strategy has run too far too fast in recent years. Indeed, compared with the broad market (SPY), MTUM has outperformed by a wide margin over the past three years, rising more than 77% vs. SPY’s 55% advance. Large-cap value stocks, on the other hand, have trailed the market and momentum by a wide margin over that span, advancing by a comparatively moderate 39%.

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