What is IMTM? (Pros, Cons, and Strategies)

If you're considering diversifying your investment portfolio beyond domestic stocks, international ETFs like IMTM might catch your attention. Many investors use IMTM (iShares MSCI Intl Momentum Factor ETF) to capitalize on global momentum stocks, potentially enhancing portfolio returns through diversification. Today, we'll explore IMTM's features, advantages, and disadvantages, and discuss some investment strategies.

What is IMTM?

IMTM is an ETF that targets international stocks exhibiting strong momentum. IMTM stands for the iShares MSCI Intl Momentum Factor ETF.

IMTM tracks the MSCI World ex USA Momentum Index, which selects stocks based on their relative performance relative to others in the past 6 and 12 months.

Unlike traditional international ETFs that may include a broad selection of stocks from various countries, IMTM focuses on stocks that have shown consistent upward price movement, aiming to capitalize on the momentum anomaly.

Key Features of IMTM

• Focuses on stocks outside the U.S.
• Follows the MSCI World ex USA Index, excluding emerging markets
• Selects stocks based on past performance to capture upward momentum

The index rebalances semi-annually to reflect the most recent momentum leaders, ensuring that stocks with current high momentum continue to be part of the ETF.

IMTM Composition

IMTM comprises a diverse mix of internationally-recognized companies like Nestle, Roche, and Toyota. The ETF is weighted towards sectors and regions where momentum is strong, often including a significant portion of stocks from developed European and Asian markets. Compared to broad international ETFs, IMTM has a more targeted approach, focusing predominantly on companies demonstrating strong past performance.

Pros of IMTM

Potential for Higher Returns

IMTM aims to exploit the momentum factor, a well-documented phenomenon that has historically delivered higher returns. By investing in stocks exhibiting strong upward trends, IMTM can potentially offer higher returns compared to traditional international indices.

Diversified International Exposure

By excluding the U.S. and focusing on developed markets outside North America, IMTM provides investors with a diversified set of international stocks. This diversification can reduce overall portfolio risk and exposure to country-specific events.

Systematic Strategy

IMTM's systematic approach to selecting momentum stocks ensures a disciplined and rule-based investing process. This reduces the emotional and psychological biases that can affect individual stock-picking decisions.

Cons of IMTM

High Volatility

Momentum investing is inherently more volatile. Stocks with strong recent performance can experience sharp declines if market conditions change. This volatility can be challenging for risk-averse investors.

Higher Expense Ratio

Compared to passive international ETFs, IMTM has a relatively higher expense ratio. The expense ratio for IMTM is around 0.30%, which can be a significant cost over long-term investments.

Concentration Risk

IMTM's focus on momentum stocks can lead to sector and regional concentrations. If certain sectors or regions (like technology in Europe) dominate the momentum index, this can expose investors to sector-specific risks.

IMTM Investment Strategies

IMTM is a suitable option for investors looking to capture international momentum. However, due to its higher volatility and expense ratio, it requires a considered approach. Let's explore some strategies.

Long-term Investment Strategy

For investors with a long-term horizon, IMTM can be a valuable addition to a diversified portfolio. Over extended periods, momentum strategies have shown to outperform, making IMTM a good fit for those willing to endure short-term volatility.

Tactical Allocation

Investors can use IMTM as a tactical allocation within their international equity exposure. By periodically reallocating between IMTM and more stable international ETFs, investors can enhance returns during bullish cycles while reducing risk during downturns.

Combining with Other ETFs

IMTM can be paired with other ETFs like developed market or emerging market funds, creating a balanced international portfolio. This combination can provide both momentum-driven growth and broader market stability.

Dollar-Cost Averaging

Investing a fixed amount in IMTM regularly, regardless of its price, can mitigate the risks associated with market timing. This strategy, known as dollar-cost averaging, can reduce the impact of volatility and help grow investments steadily over time.

Conclusion

IMTM leverages the momentum factor to offer potential for high returns through systematic selection of international stocks. While it provides diversified international exposure and systematic rebalancing, it also comes with higher volatility and costs. By understanding its risks and employing prudent investment strategies, IMTM can be an excellent tool for investors aiming to enhance their global equity portfolios through momentum investing.

Carefully consider your risk tolerance and investment horizon before incorporating IMTM into your portfolio. Happy investing!