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

If you're looking to capitalize on market momentum and are considering ETFs, MMTM might be on your radar. MMTM is the SPDR S&P 1500 Momentum Tilt ETF, designed to capture the performance of stocks exhibiting strong momentum characteristics. In this blog post, we'll dive into what MMTM is, its advantages and disadvantages, and some strategies to maximize its potential.

What is MMTM?

MMTM, or the SPDR S&P 1500 Momentum Tilt ETF, is a product that seeks to provide exposure to stocks within the S&P Composite 1500® that possess strong momentum characteristics. The idea is to take advantage of stocks that have been moving in a certain direction—whether up or down—and may continue to do so.

Key Features of MMTM

• Momentum-Based Selection: MMTM focuses on stocks within the S&P Composite 1500 that have exhibited strong momentum.
• Broad Market Exposure: The ETF provides broad exposure across various sectors, as it derives its picks from a vast index.
• Quarterly Rebalance: The fund is rebalanced quarterly to ensure it remains aligned with its investment strategy.

The goal of MMTM is to identify and invest in stocks that have shown recent price strength, with the expectation that these trends will continue.

MMTM Composition

MMTM comprises stocks from the S&P Composite 1500 that exhibit high momentum traits. This means it includes companies from a wide range of sectors, pulling from large, mid, and small-cap stocks. This diversified approach helps mitigate sector-specific risks while focusing on momentum.

Pros of MMTM

Capturing Momentum

The primary benefit of MMTM is its focus on momentum stocks. By investing in stocks that are already in upward trends, it leverages the market's natural tendency to continue in the same direction for a certain period. This can potentially result in higher returns, especially during bullish markets.

Broad Diversification

Because MMTM draws from the S&P Composite 1500, it has a broad base of companies across various sectors. This diversification can help reduce the risk associated with investing in a single sector, providing a more balanced risk-reward profile.

Regular Rebalancing

MMTM is rebalanced quarterly to ensure that it continues to hold stocks that meet its momentum criteria. This continual adjustment helps the fund stay true to its strategy, potentially maximizing returns by constantly shifting to stocks with the highest momentum.

Moderate Expense Ratio

MMTM has a competitive expense ratio of 0.15%. This is relatively lower than many other actively managed funds, making it a cost-effective option for investors looking to capture momentum without incurring high fees.

Cons of MMTM

Volatility

Momentum investing inherently involves higher volatility. Stocks with high momentum can experience significant price swings, leading to a more volatile portfolio. Investors should be prepared for this added risk.

Market Dependency

MMTM's performance is closely tied to broader market movements. During bear markets or periods of high market uncertainty, momentum strategies can underperform as market trends reverse or become less predictable.

Short-Term Focus

While MMTM provides exposure to stocks with strong price momentum, it is inherently a short-term strategy. This focus can sometimes lead to higher turnover rates and transaction costs, which can eat into overall returns.

MMTM Investment Strategies

To make the most out of MMTM, it's essential to align your investment approach with the fund's characteristics and your financial goals. Here are some strategies to consider:

Tactical Asset Allocation

Given MMTM's focus on momentum, it can be used as part of a tactical asset allocation strategy. This involves adjusting your portfolio based on the prevailing market conditions. For instance, increasing exposure to MMTM during bullish markets and reducing it during bearish trends can help optimize returns.

Core and Satellite Approach

MMTM can serve as a "satellite" position in a broader investment portfolio, where the core is composed of more stable, long-term investments. By allocating a smaller portion of your portfolio to MMTM, you can capitalize on momentum opportunities while maintaining overall stability.

Regular Monitoring and Rebalancing

Due to the nature of momentum investing, regular monitoring and rebalancing are crucial. Keeping an eye on market trends and adjusting your holdings in response to changes can help maximize returns and manage risks.

Complementary Investments

Pairing MMTM with other ETFs or assets that provide stability or diversification can yield a more balanced portfolio. For example, combining MMTM with a low-volatility or high-dividend ETF can offset some of its inherent risks.

Conclusion

MMTM provides a unique opportunity for investors looking to capitalize on momentum in the stock market. With its broad diversification, regular rebalancing, and moderate expense ratio, it offers a viable option for those willing to tolerate higher volatility for the potential of higher returns. By implementing thoughtful strategies and staying attuned to market conditions, investors can effectively use MMTM as part of a diversified investment portfolio.