Imagine an ETF that exclusively selects the top 100 S&P 500 companies. It then rebalances them twice a year. This ensures you always hold the “best of the best.” This strategy has recently outperformed even popular growth ETFs like QQQ. This article will compare the Invesco S&P 500 Momentum ETF (SPMO) against QQQ and SPY. We’ll dissect its unique momentum strategy, performance, holdings, and potential advantages and disadvantages for investors. Share your thoughts on momentum ETFs in the comments below.
Understanding Momentum Investing: The Strategy Behind SPMO
What is Momentum Investing?
Momentum investing is a strategy. It capitalizes on the tendency of well-performing stocks. They tend to keep performing well in the short to medium term. The core principle is “strength breeds more strength.” Investors buy assets that show upward price trends. This isn’t based on valuation. It’s based on past performance. Think of two ETFs. One has been crushing it for the last 12 months. The other is flat. Momentum investing says go with the winner.
The Dynamic Nature of Momentum Strategies
Momentum is not permanent. It eventually fades. Momentum strategies must be dynamic. They need to rebalance frequently. This helps them adapt to changing market trends. SPMO is built entirely around this dynamic rebalancing concept.
Invesco S&P 500 Momentum ETF (SPMO): A Deep Dive
Identifying SPMO
Today’s fund is the Invesco S&P 500 Momentum ETF (SPMO). A viewer mentioned it in a comment. This highlights community engagement. The ETF has a five-star Morningstar rating. It also boasts a low expense ratio of 0.13%.
SPMO’s Selection Methodology
SPMO tracks the S&P 500 Momentum Index. It selects 100 companies from the S&P 500. Its momentum score calculation evaluates stock price movement. This happens over the past 12 months. It then adjusts this evaluation based on volatility.
Performance Comparison: SPMO vs. QQQ vs. SPY
Recent Performance (Last 12 Months)
SPMO delivered a 40.11% total return. QQQ returned 28.94%. SPY managed 21.86%. SPMO significantly outperformed both QQQ and SPY in the past year.
Medium-Term Performance (Last 3 Years)
SPMO returned 29% annualized. QQQ returned 22%. The S&P 500 (SPY) returned 17%. SPMO continues to outperform in the medium term.
Long-Term Performance (Last 10 Years)
SPMO is about 10 years old. It was founded in September 2015. Over the last 10 years, QQQ turned $10,000 into $54,000. SPMO turned $10,000 into $50,000. The S&P 500 (SPY) turned $10,000 into $36,000. QQQ shows slightly higher annualized returns over the decade. However, SPMO shows lower volatility.
Volatility and Drawdowns
QQQ’s maximum drawdown was -32%. SPMO’s was -21%. SPMO has a beta of 0.94. QQQ’s beta is 1.11. Beta shows volatility compared to the market. A value lower than one means less volatility. A value higher than one means more volatility. SPMO exhibits lower volatility and smaller drawdowns compared to QQQ. This suggests potential downside protection.
Sector Allocation and Holdings: Diversification Matters
QQQ Sector Concentration
QQQ has 11% in midcap. It holds 88% in large cap. Technology is the strongest sector. Over 52% of holdings are in tech. This overconcentration in technology can lead to increased volatility. Technology also has an incredibly high price-to-earnings ratio.
SPMO Sector Diversification
SPMO’s sectors are wonderfully distributed. Technology has a slight overweight at 23%. Financials, Consumer Discretionary, and Communications follow. All sectors are represented with decent weight. This diversification helps reduce overall portfolio volatility.
Top Holdings Comparison
The top holdings show some overlap between the funds. SPMO includes Customer Discretionary and Staples companies. Think Walmart and Costco. It also includes Financials like JPMorgan Chase. QQQ and the S&P 500 top holdings are dominated by tech companies.
The Nuances of Momentum: Strengths and Weaknesses
Momentum as a Factor
Momentum is a recognized factor. It historically delivers above-average returns. Other factors include market risk, size, value, and profitability. Momentum simply states that stocks that have gone up recently tend to keep going up. This applies in the short to medium term.
When Momentum Shines (Bull Markets)
Momentum strategies excel in bull markets. They ride strong trends. They often outperform during market rallies.
When Momentum Falters (Choppy Markets)
Momentum can lag in choppy markets. It falters when market direction changes rapidly. The strategy looks in the rearview mirror. It’s based on what worked, not what will work. Momentum works until it doesn’t.
SPMO’s Rebalancing Advantage
SPMO rebalances twice a year. This allows the ETF to quickly move from underperforming companies. It shifts into those gaining momentum. For example, in 2022, it reduced its weight in crashing tech stocks. It then pivoted hard into energy. When tech made a comeback in 2023, it shifted right back. When considering momentum ETFs, always check their rebalancing frequency.
European Alternatives and Considerations
There is no direct European equivalent to SPMO. The Invesco S&P 500 QVM UCITS ETF (QVM) is a potential option. However, QVM is not exactly the same. QVM stands for Quality, Value, and Momentum. It doesn’t focus solely on momentum. This might be an advantage. Focusing on momentum alone is not always a good idea.
Conclusion: Is SPMO Worth It?
SPMO has delivered solid returns. It recently exceeded QQQ. It has also shown less volatility than QQQ over the past decade. This is largely due to quick rebalances. Strong momentum companies have kept their momentum for over 10 years. SPMO offers superior sector diversification compared to QQQ. This contributes to its lower volatility.
Consider SPMO if you believe in the power of trends. If you’re okay with some turnover, it might be for you. If you want an ETF that actively hunts for winners inside the S&P 500, SPMO could be a strong addition. SPMO could serve as a valuable satellite position in a portfolio. It has a low expense ratio. This makes it an attractive option. Investing in SPMO and comparing its future performance to QQQ is a valid approach.
Did you know about momentum ETFs before? Would you invest in an ETF like this? Or do you think chasing winners is a dangerous game? Drop your thoughts in the comments. Subscribe for more ETF comparisons and insights. Check out this other ETF comparison video next.
