Author Topic: MSCI world momentum ETF  (Read 2220 times)

Grog

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MSCI world momentum ETF
« on: January 20, 2015, 05:28:46 AM »
Hi everyone
I0ve seen the first ETF following the MSCI world momentum index.
Here a link to the pdf showing the difference with MSCI world:
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-momentum-index-usd-gross.pdf

In this link you can read since 1973 (end of gold standard? That's whay is chosen?) the Momentum index has an average return of 2.6%/y more then the normal index.
This ETF can be had with a TER of 0.30%, only slightly superior to many MSCI world / FTSE dev World index (around 0.15%-0.25%. Vanguard All-World is at 0.25%).

What can be the risks involved? I see that at this moment it concentrates health care (~30%) and US (~75%). It has 384 stocks, does it still count as "diversified"?

It's sort of a passive strategy (momentum weighting of 6-12 months instead of cap weighting). What about if they change the "momentum" timing? Does it happen often in this kind of ETF that they just change the underlying strategy/time-frame (eg they go for 3-months momentum instead of 6)?

I see this has a possibility to tilt your portfolio "passively", i.e if health care is going strong but then is energy that has momentum you don't have to change sector/country tilt but this ETF does it for you. At 0.30% seems like a good deal to me.

I see that it seems to have lower volatility, but it has (of course) much higher tracking error and turnover.

What are your thoughts?

hodedofome

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Re: MSCI world momentum ETF
« Reply #1 on: January 20, 2015, 08:08:18 AM »
Depending on how they structure the ETF, you may not have to worry about taxes until you sell it. That could be a good deal. Otherwise the turnover could be a problem in a taxable account.

However, the problem with most momentum funds (and most actively managed funds in general) is that they hold way too many stocks to ever hope to outperform. They are too diversified. There's probably less than 100 stocks for a value investor or momentum investor, that are worth holding. Yet most funds have hundreds if not thousands of stocks. Part of this is so that they can manage a lot more money. You can't jump in and out of 50 stocks when you are managing billions of dollars. So they go for 500 stocks and dilute their investors' returns.

On top of that, most funds, even if they say they are value or momentum or growth or whatever, still weight the fund according to market cap. MSCI World Momentum says they incorporate momentum into the weighting but they also use market cap. This dilutes returns over an equal weight or pure momentum weight. Market cap is the worst weighting method however most use it for liquidity reasons.

More info here: http://www.dualmomentum.net/2014/11/individual-stock-momentum-that-dog-dont.html

Dorsey Wright has some momentum ETFs that are more concentrated (I think around 100 holdings) but they don't have a world ETF, they are split into US large, US Small, Int'l Developed and Emerging Markets.

I wouldn't worry about the strategy changing on you. I don't think they would change the look-back windows from 6/12 to 3/6 or whatever. Most of the momentum research is in the 6-12 month timeframe so I would bet they stick with that.

If they lowered the number of stocks, equal weighted it and rebalanced it monthly, I'd probably be all over it (but then I'd also want them to close the fund so the strategy continues to work well!). As it stands it's probably not a horrible implementation but for the individual investor it could be a lot better.
« Last Edit: January 20, 2015, 08:10:26 AM by hodedofome »

Grog

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Re: MSCI world momentum ETF
« Reply #2 on: January 20, 2015, 02:20:05 PM »
Ehy thanks for the link. Is momentum effect really proven? I have the impression they just tend  fit back data into a neat curve. They should demonstrate the 6 months effect with cause, not because they are the best fitting.

PEIslander

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Re: MSCI world momentum ETF
« Reply #3 on: January 21, 2015, 03:29:28 AM »
I'd also want them to close the fund so the strategy continues to work well!

Please explain the implications of the fund being open vs. closed.

hodedofome

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Re: MSCI world momentum ETF
« Reply #4 on: January 21, 2015, 06:00:24 AM »
The more money chasing after a strategy means the less returns it'll make. In a concentrated stock portfolio, there's only so much money that can handle. You cant own 30 stocks in a portfolio of 20 billion and buy and sell new ones every month. The market cant handle that type of volume. Any concentrated mutual fund is going to close itself to new investors after a certain point.