Artificial intelligence-related stocks have soared so much that they will have an increased presence in a “momentum” index. That, in turn, could further push up these stocks.
Nvidia
(NVDA) stock has more than doubled this year, while
Microsoft
(MSFT),
Broadcom
(AVGO) and
Oracle
(ORCL) are all up more than 20%. That beats the
S&P 500’s
roughly 9% gain for the year. These companies are improving their products by layering AI into them, which could expand the market for these goods and services, and it could also help these companies take more market share. Already, Microsoft’s better-than-expected earnings and outlook for growth came partly on the back of its AI enhancements.
The gains have landed these stocks further into the momentum category. That means they have outperformed recently, but with low volatility. Usually in financial markets, the potential for a high return means higher risk, which is essentially measured through an asset’s price volatility. So investors love when they can find a higher performer that isn’t volatile.
That’s captured in the
iShares MSCI USA Momentum Factor Exchange-Traded Fund
(MTUM). It holds between 100 and 350 stocks that have been the best combination of high performance in the last six to 12 months with low volatility over the past three years. It has a current weighting toward the technology sector of just about 3%, which should rise to 21% upon the rebalancing on May 26, according to Wells Fargo.
“Specifically, the increase should be driven by Semis +9% (NVDA, AVGO) and Software +9% (MSFT, ORCL),” wrote Chris Harvey, chief U.S. equity strategist at Wells Fargo.
One near-term question is what that means for how these stocks will trade through the end of the month. The market value of all of the fund’s shares sits at about $9 billion, according to FactSet, versus trillions of dollars combined for the stocks mentioned above. That means any buying pressure from the ETF in a few days may not be enough to “move the needle,” says Keith Lerner, co-chief investment officer at
Truist.
But if others jump in on the buying activity, the stocks should see enough demand to rise.
“I think it’s material enough to affect the stock one way or another,” said Kevin Simpson, founder and chief investment officer of Capital Wealth Planning.
The flip side is that some market participants may have already bought enough of these stocks already, and could therefore sell a bit soon. That selling could offset the buying pressure, and keep the stocks flat, or send them lower.
“There certainly could be modest profit-taking at the same time ETFs are buying to rebalance,” Simpson says.
Whatever the next few days bring, one thing is for sure: more of these stocks in the momentum ETF is a nod to AI and the investment returns the market should continue receiving from it.
Write to Jacob Sonenshine at [email protected]
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