Revival Of Value Stocks And Index Rebalancing Towards Cheaper Cyclincal Stocks

by confoundedinterest17

Global momentum stocks just got a whole lot cheaper.

The forward price-earnings ratio on the MSCI World Momentum Index — a gauge of the best-performing stocks — slumped to 18 times last week from more than 30 times after a scheduled rebalancing.

The trigger was the change of leadership in the global stock market, with cheaper economically-sensitive shares taking over from expensive growth ones. An MSCI gauge of global value stocks is up 16% this year — compared with just 6% for the growth equivalent — meaning the reshuffle in the momentum basket favored the cheaper cyclical shares.

A $16 billion exchange-traded fund is set for a monster makeover this week in favor of value shares over tech as it chases the hottest trends on Wall Street.

BlackRock Inc.’s iShares MSCI USA Momentum Factor ETF (ticker MTUM) will see “an astounding” 68% of its portfolio holdings change in order to hold the market’s top performers over the past year, according to Wells Fargo estimates.

The rebalancing of the quant strategy, due on or around Thursday, will push the weighting of financial stocks to a third from less than 2% currently, the strategists reckon. The technology sector will slide to 17% from 40%.

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It all underscores the intensity of the risk-on stock rotation, away from pandemic-induced economic misery to vaccine- and stimulus-fueled optimism. The rolling one-year performance of the value factor — which bets on cheap-looking shares and against expensive peers — is near its strongest since the global financial crisis.

“We expect MTUM to morph from an expensive, high-growth play to a higher-mo’ basket with benchmark-like growth/value characteristics,” Wells Fargo analysts led by Christopher Harvey wrote in a note. “The fund’s Quality drops somewhat.”

MTUM is part of a breed of ETFs known as smart-beta funds, a $1.4 trillion industry whose philosophy is mostly to pick stocks by some quantifiable characteristic.

The ETF ranks stocks by their returns over a six month- and one-year horizon, and rebalances semiannually — less frequent than most factor quants. That means it’s clung onto underpeforming tech megacaps longer than peers.

With the likes of Netflix Inc. and Apple Inc. faltering this year, the ETF is on course to lag the broader American market for a third straight quarter — its worst run since its 2013 inception.

By contrast, value stocks have been consistently dominating the equity leaderboard since November. The reconstitution this week could therefore help MTUM regain its mojo — provided the strategy remains in the ascendancy.

MTUM got its mojo working.



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