JOET's Momentum Stumbles: Can Quality Save the Fund?

The virtus Terranova U.S. Quality Momentum ETF (JOET) has long touted its blend of quality fundamentals and price momentum as a recipe for resilient growth. Yet, recent performance data raises critical questions about whether this dual strategy can weather volatility in an uneven market. While JOET’s equal-weighted portfolio design and focus on large-cap stability are strengths, its underperformance relative to peers and sector-specific risks have investors pausing. Let’s dissect whether the fund’s flaws are fixable—or if they signal deeper strategic missteps.

The Strategy: Quality Meets Momentum

JOET’s mandate is to track the Terranova U.S. Quality Momentum Index, which selects large-cap U.S. equities based on two pillars:
1. Quality Metrics: Balance sheet strength, profitability, and earnings stability.
2. Momentum Signals: Price trends and trading volume.

This dual focus aims to capture companies with strong fundamentals and upward price momentum, theoretically balancing growth and risk. The portfolio’s equal-weighted structure further reduces concentration risk, as seen in its 8.59% allocation to top 10 holdings versus a category average of 44.84%.

Underperformance: A Momentum Hangover?

While JOET’s 1-year return of 13.3% as of April 2025 outperformed its ETF category average (6.48%), its year-to-date decline of -2.3%—worse than the S&P 500’s -1.87%—hints at vulnerabilities. The fund’s beta of 1.02 amplifies its sensitivity to market swings, and its tech-heavy tilt (e.g., semiconductors and software) has left it exposed to sector-specific headwinds.

The momentum component, in particular, appears problematic. Momentum strategies thrive in trending markets but falter during corrections, as seen in Q1 2025 when tech stocks faced profit-taking. The fund’s shift in top holdings—from pure tech plays like NVIDIA (1.19% in 2024) to more diversified names like Progressive Corp (1.0% in 2025)—suggests rebalancing attempts, but these moves haven’t yet stabilized returns.

Volatility: A Structural Weakness?

JOET’s volatility metrics paint a mixed picture. Its annualized volatility of 18.2% in early 2025 was lower than its 2024 peak of 37.37%, but this improvement comes after a period of market calm. The fund’s Herfindahl-Hirschman Index (HHI) of 80 reflects moderate concentration, yet its tech focus creates sector-specific risks. For instance, a 10% drop in semiconductor stocks—a common occurrence—could disproportionately impact returns.

The bid/ask spread of 0.16% and rising average daily volume (52,000 shares) suggest liquidity isn’t an issue, but structural risks remain. The fund’s reliance on momentum means it could lag further if markets enter a prolonged sideways or downward trend.

Cost and Governance: A Silver Lining

JOET’s 0.29% expense ratio is a bright spot. It undercuts actively managed peers and even some passive ETFs, providing a cost edge. The parent company, Virtus Investment Partners, maintains a governance structure focused on aligning investor interests, and managers like Seth Kadushin (with 37 years of ETF experience) bring credibility. Yet, these strengths can’t offset persistent underperformance if structural flaws persist.

The Verdict: A Mixed-Bag Opportunity

JOET’s strategy isn’t inherently flawed, but its execution faces hurdles:
1. Sector Overlap: Tech’s dominance (over 40% of holdings historically) creates a double-edged sword—growth in upswings, pain in downturns.
2. Momentum Timing: Capturing trends consistently requires flawless market timing, which even seasoned managers struggle with.
3. Equal-Weight Limits: While reducing single-stock risk, it also means underperforming sectors drag the entire portfolio.

The fund’s ALTAR Score™ of 5.0% (vs. a category average of 6.1%) underscores valuation concerns, particularly its 3.2x forward price-to-book ratio.

Conclusion: A Fund for Bulls, Not for Nerves

JOET remains a viable holding for investors bullish on U.S. large-caps and willing to tolerate volatility. Its low fees and structural diversification (127 holdings) offer advantages, and its recent shift toward financials and cybersecurity stocks (e.g., Check Point Software) hints at adaptability. However, its tech-heavy momentum bets make it a market-cycle-sensitive play—ideal in growth phases but a liability in corrections.

For now, the jury is out: JOET’s underperformance and volatility are symptoms of its strategy’s design, not its demise. Investors must weigh whether the fund’s potential rewards in rising markets justify the risks in choppy waters. In a world of mixed signals, this ETF may thrive when quality and momentum align—but investors should proceed with caution.

Ask Aime: "Is Virtus Terranova U.S. Quality Momentum ETF (JOET) still a good investment option amidst market volatility?"