Investors Prefer Value ETFs to Momentum Funds

Historical data indicate that, from year to year, some individual investment factors outperform while others lag. That scenario is on display in 2017, as growth and momentum stocks are delivering impressive returns while value names are lagging. But in the world of exchange-traded funds (ETFs), the popularity of certain factor funds is not always indicative of year-to-year or year-to-date performance. Among factor-based ETFs, which fall under the purview of smart beta, assets under management totals indicate that investors love value funds, while many remain apprehensive about embracing momentum-driven ETFs.

Just look at the gap between the  iShares Edge MSCI USA Momentum Factor ETF (MTUM) and the Vanguard Value ETF (VTV). MTUM is four and a half years old with $4.1 billion in assets under management, making it the largest dedicated momentum ETF. Although it is older, VTV is home to a whopping $32.4 billion in assets under management (as of Aug. 31), making it not only the biggest value ETF but also the largest smart beta fund. (See also: An Introduction to Factor Investing.)

Year to date, MTUM is up 29.1% compared with 10.7% for VTV, yet many investors are avoiding the momentum factor and related funds. "Momentum as a factor is still shunned by much of Wall Street. There are hundreds of billions of dollars invested in value strategies, but the biggest momentum ETF has just $4 billion in it, with $500 million in the next largest," said Michael Batnick in a recent note. "I guess it's hard to sell the idea that rising prices attract buyers and falling prices attract sellers." (See also: Value Investing: Why You're Doing It Wrong.)

Perhaps some investors have it in their minds that momentum can be fleeting. Indeed it can be, but since coming to market in April 2013, MTUM has returned nearly 102% compared with about 72% for VTV. Making that gap all the more startling is the fact that MTUM's annualized volatility over that period is only 100 basis points higher than VTV's. Furthermore, MTUM's maximum drawdown since coming to market is actually 40 basis points below VTV's.

Investors' preconceived notions about momentum may also explain why ETFs such as MTUM may never be as large as comparable value funds. Dispelling those notions is another issue. "Even if investor preferences change, and momentum's popularity picks up, the idea that investors herd is so ingrained in our DNA that it might be the only factor that cannot be arbitraged away," adds Batnick. (See also: Riding the Momentum Investing Wave.)

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