In the financial market, exchange-traded funds (ETFs) play a critical role in providing investors with diverse investment opportunities. While the Vanguard S&P 500 ETF (VOO) is a popular choice due to its breadth and low fees, it’s the less-known Invesco S&P 500 Momentum ETF (SPMO) that’s currently commanding attention. SPMO’s strategic focus on momentum-driven investments has allowed it to surpass VOO with significant year-to-date returns of 20.14%, compared to VOO’s 8.71%. For those unfamiliar, both ETFs are based on the S&P 500 but differ significantly in their approach to investment and returns. SPMO’s methodology focuses on maximizing momentum within the index by re-weighting investments toward stocks with strong price trends.
In earlier assessments, SPMO consistently showcased resilience against downturns compared to VOO. During various market fluctuations, it has managed to withstand volatility better, maintaining more stable performance than its counterpart. It rebounded sharply during past corrections, unveiling its capacity to sustain and even thrive, amid market shifts. Despite this, historical data also reveals that while it outshines VOO in bullish periods, it still follows a conservative yet slightly volatile path during corrections.
What makes SPMO stand out?
The methodology of SPMO centers around the S&P 500 Momentum Index. This index reviews price histories and deliberately excludes short-term price spikes, let the fund ride on sustained positive trends. Rebalancing occurs only twice a year, allowing the fund to capitalize on trends without incurring excessive transaction costs. SPMO’s strategy has clearly delivered for those looking to benefit from momentum-based investing.
Why opt for momentum investing?
The success of SPMO isn’t merely rooted in its ability to produce returns superior to those of VOO. By diversifying across 100 holdings, SPMO maintains a balanced approach. This is a critical factor differentiating it from traditional ETFs focusing narrowly on high-growth stocks. During periods of downturn, SPMO has managed relatively similar drawdowns compared to the broader market, demonstrating its diversified yet specialized focus.
Previously observed trends demonstrate that during significant market corrections, SPMO’s performance was comparable to other funds, but it rebounded faster, making up for any temporary declines. This capacity, combined with its emphasis on momentum investing, enhances its appeal to those willing to balance risk against higher returns.
Nonetheless, cost implications pose a potential drawback. VOO, with an expense ratio significantly lower than that of SPMO, presents an economic choice over long-term periods, especially when compounded over large investments. Further comparisons reveal VOO’s advantage in terms of dividend yields, offering higher returns on this front compared to its momentum-focused counterpart.
However, SPMO’s shorter history since its inception in 2015 questions its resilience in recession—potentially a factor in investment decisions. Considering its strategic focus, investors anticipate its underperformance in economic contractions to be less severe, though its favorable performance in bullish phases remains a major attraction.
For those contemplating delving into SPMO, long-term investors with higher risk tolerance may find it suitable for capturing momentum-driven growth opportunities. It’s a fitting choice for those convinced that sectors such as artificial intelligence will continue driving economic growth in future market environments.
