MW This momentum-stock fund can lower your risk. It has outperformed the S&P 500.
By Philip van Doorn
It might surprise you that a strategy focused on the best recent performers can limit downside risk and ride high during bull markets
If you are trying to build a diversified investment portfolio using exchange-traded funds, you can select funds by geography or by the size of companies whose stocks are held by a fund. It's also helpful to include a fund that rides price momentum. Although this might seem to be a more aggressive strategy than a regular index fund, it can also outperform through a bear-and-bull-market cycle.
A discussion of portfolio diversification must begin with market concentration. A broad index, such as the S&P 500 SPX, is typically weighted by market capitalization. At times it can be highly concentrated, as it is now. The "Magnificent Seven" group of companies - Apple Inc. $(AAPL)$, Nvidia Corp. $(NVDA)$, Microsoft Corp. $(MSFT)$, Amazon.com Inc. $(AMZN)$, Alphabet Inc. $(GOOGL)$ $(GOOG)$, Meta Platforms Inc. $(META)$ and Tesla Inc. $(TSLA)$ - make up 32% of the SPDR S&P 500 ETF Trust SPY. The top three holdings make up 19.6% of the portfolio.
The $5.6 billion Invesco S&P 500 Momentum ETF SPMO holds only three of the Magnificent Seven in its portfolio of 100 stocks. Together, Amazon, Nvidia and Meta comprise 26% of the portfolio. So it's less concentrated to the Magnificent Seven than the SPY is, but it is more highly concentrated at the top.
Momentum strategy
The Invesco S&P 500 Momentum ETF's portfolio is reconstituted twice a year on the third Fridays in March and December.
The portfolio is weighted by momentum score and market capitalization. Twice annually the components of the S&P 500 are ranked by how much their prices have risen over the previous 12 months, excluding the most recent month, and then scored to take volatility into account. The portfolio is made up of the 20% of companies in the S&P 500 that score highest, and then weighted by a combination of the momentum score and market capitalization.
On the surface, this might seem to be an aggressive strategy, because it leans toward recent success, with some tempering for volatility. But the full reconstitution every six months means "there is potential to exit companies undergoing a downtrend for fundamentals," according to Nick Kalivas, Invesco's head of factor and core ETF strategy.
Within the fund, the concentration to Magnificent Seven "has gone from 40% in 2021, then to zero during 2022 to early 2023, then 40% in March 2024. It can really bob and move," Kalivas told MarketWatch.
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Outperformance
The Invesco S&P 500 Momentum ETF has been around in its present form since June 2019, when it underwent a complete change in strategy.
The S&P 500 went through a broad decline in 2022, led by tech-oriented companies such as Tesla, whose stock was down 65% that year. Then the index roared back during 2023 and added more gains in 2024.
So we have a broad downturn and a bull market for a decent cycle comparison that illustrates how the Invesco S&P 500 Momentum ETF's "method to exit or enter," to use Kalivas's words, has differentiated its performance from that of the cap-weighted S&P 500.
Here is a comparison of returns for the Invesco S&P 500 Momentum ETF and the S&P 500, with dividends reinvested and net of the fund's expenses, which are 0.13% of assets under management annually:
ETF 2024 return 2023 return 2022 return 3-year return through 2024
Invesco S&P 500 Momentum ETF 45.8% 17.5% -10.5% 53.5%
S&P 500 25.0% 26.3% -18.1% 32.9%
Source: FactSet
The fund avoided a good portion of the S&P 500's decline in 2022, and then recovered less quickly than the index did in 2023, before soaring ahead of the index as the bull market continued through 2024.
For a more up-to-date comparison, this chart shows total returns from the end of 2021 through Monday:
In October we looked at long-term performance for nine Invesco factor ETFs that select from the S&P 500.
Here are the top 10 holdings (out of 100) of the Invesco S&P 500 Momentum ETF. Keep in mind that the fund's portfolio will be fully reconstituted, as explained above, less than a month from now.
Company Ticker % of SPMO portfolio 1-year return through Feb. 24
Amazon.com Inc. AMZN 9.8% 21.6%
Nvidia Corp. NVDA 9.1% 65.3%
Meta Platforms Inc. META 7.2% 38.4%
Broadcom Inc. AVGO 6.8% 62.5%
Berkshire Hathaway Inc. Class B BRK.B 5.8% 19.5%
Eli Lilly and Co. LLY 5.7% 15.3%
JPMorgan Chase & Co. JPM 5.5% 45.3%
Costco Wholesale Corp. COST 4.1% 41.1%
Walmart Inc. WMT 2.5% 62.0%
GE Aerospace GE 2.2% 63.6%
Sources: Invesco, FactSet
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Read: Tomi Kilgore's detailed guide to the information available on the MarketWatch quote page
Momentum for smaller companies
Invesco also has momentum ETFs that select from the components of the S&P MidCap 400 Index MID and the S&P Small Cap 600 Index SML. Here are performance comparisons for three years through 2024:
ETF 2024 return 2023 return 2022 return 3-year return through 2024
Invesco S&P MidCap Momentum ETF 38.0% 20.4% -16.0% 39.5%
S&P Mid Cap 400 13.9% 16.4% -13.1% 19.8%
Invesco S&P SmallCap Momentum ETF 17.4% 21.5% -15.5% 20.7%
S&P Small Cap 600 8.7% 16.1% -16.1% 8.9%
Source: FactSet
The S&P 400 MidCap and the S&P 600 Small Cap indexes are less concentrated than the S&P 500 because of their size limits for component companies. This might explain why the respective Invesco momentum ETFs showed greater declines in 2022. But both momentum strategies outperformed their underlying indexes by wide margins for the full three years.
"Momentum has this ability to pick up what is working in the market," Kalivas said, citing the development of artificial-intelligence technology and GLP-1 weight-loss medications as examples. And as trends move on, so can the strategy, since "there is potential to exit companies undergoing a downtrend for fundamentals. That might take a cycle or two, but there is a mechanism for exit, unlike the S&P 500," he noted.
Kalivas stressed that the strategy can fit well with a portfolio mix, for returns that are differentiated from the cap-weighted S&P 500.
"Momentum is the life of the party. It shows up late and has a tendency to stay too long, but in the middle of the trend, it really tends to generate strong returns," he said.
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-Philip van Doorn
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February 25, 2025 09:41 ET (14:41 GMT)
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