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Billions of dollars just fled momentum stocks for low volatility

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Heads must be spinning…

Investors are losing faith in momentum and pouring billions of dollars into low-volatility stock funds, another sign of increasingly defensive posturing as market confidence deteriorates.

The iShares Edge MSCI USA Momentum exchange-traded fund MTUM, -0.57% , a good proxy for the equity momentum trade overall, saw inflows for the first eight months of the year, until a violent reversal over the past month, according to an analysis from Ned Davis Research. In fact, investors pulled so much money out of MTUM — $1.2 billion — in the past month alone that it’s now down $235 million in the year to date.

As a reminder, the momentum trade in the stock market is one that does well in the waning stages of an expansion, when investors aren’t as keen on finding lower-priced value stocks that may turn out profitable later on. “Momentum” implies buying more of the same that others have already bid up.

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At the end of the summer, it looked briefly like the momentum trade was being replaced by a rotation to value stocks, as central bank stimulus seemed to buy more time for investors. But now there’s an extra note of caution in the way exchange-traded fund investors are positioning themselves, noted Ned Davis’ Will Geisdorf.

The iShares Edge MSCI Min Vol USA fund USMV, +0.04% is the ETF that’s experienced the most inflows so far this year: $12.4 billion total, with $2.3 billion of that in the last month alone.

MarketWatch profiled USMV as part of a comparison of different low-volatility approaches this summer.

“Investors are nervous, so they are pulling money from some of the more aggressive ETFs and parking it in low vol funds,” Geisdorf told MarketWatch. What’s more, “USMV has done a great job outperforming the market during declines.”

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