The Invesco S&P 500® Momentum ETF (NYSEARCA:SPMO) is a way to invest in the market and to potentially benefit from the widely known momentum factor. In my opinion, it is not a very clean way to express your belief in momentum, but it does seem to work out fine lately as the SPMO has outperformed the S&P 500 and that’s quite a feat over the past ten years:
It has a total expense ratio of 0.13% which is quite reasonable. The ETF selects just 100 companies. It does this by tracking the S&P 500 Momentum Index. The fund and index are rebalanced twice a year, near the end of the first and third quarter. Basically, S&P ranks the S&P 500 companies according to momentum. The market caps weight the top 20% of stock, with the best momentum scores.
Personally, I’m currently neutral towards the S&P 500. Long term, I like it. In the shorter term, I’m not as convinced as volatility has surged up a few times lately, and seasonally, it’s not the best of times either. However, that’s just my take on investing in the market right now, and I don’t think there’s any edge in it.
What’s most relevant with this ETF is whether you want more exposure to an S&P 500 type exposure.
You could argue it is a consideration if you wanted to add exposure to the momentum factor, but it doesn’t serve that purpose very well. I’ll get into my doubts about this ETF, which will illustrate this point:
The ETF is rebalanced 2x per year. The advantage of infrequent rebalancing is that it cuts down on trading costs. At the same time, it dilutes the momentum factor. Just think about a momentum ETF that rebalances only once a decade. It would likely be nearly indistinguishable from the non-momentum ETF. The faster you rebalance, the more you can preserve momentum. It will be rebalanced this month, which means we are quite far away from the previous rebalancing. If you compare the top 10 constituents of both ETFs, they are:
Ticker |
Company |
% of Fund |
---|---|---|
NVDA | NVIDIA Corp. | 10.98 |
AAPL | Apple Inc. | 10.32 |
META | Meta Platforms, Inc. | 8.62 |
MSFT | Microsoft Corp. | 8.20 |
AMZN | Amazon.com, Inc. | 7.07 |
LLY | Eli Lilly and Co. | 5.52 |
AVGO | Broadcom Inc. | 4.80 |
BRK.B | Berkshire Hathaway Inc. | 3.99 |
JPM | JPMorgan Chase & Co. | 2.51 |
COST | Costco Wholesale Corp. | 2.34 |
The S&P 500 top 10 consists of the same companies but Costco (COST) and Broadcom (AVGO) don’t make the top 10 while the two share classes of Alphabet (GOOG) (GOOGL) do.
The infrequent rebalancing also means there is a lot of luck to whether you manage to capture the “momentum” factor at the right time or not. Your exposure to momentum is far from static and when the upswings/drawdowns in the factor occur matter a great deal to the end result. The quant Corey Hoffstein wrote a lot of great stuff about rebalancing and timing luck. In this article, he lays out very well how identical strategies can deliver vastly different results just by rebalancing on different days of the month.
The infrequent and telegraphed rebalancing makes it theoretically a bit easier to front-run the ETF. It is not evident from the results as these are fine, but I can imagine traders will attempt to buy S&P 500 momentum stocks just ahead of you.
My final, probably most important, point of criticism is the fact that the universe consists of S&P 500 stocks. If you broadened your universe the top-20 momentum stocks should show much greater momentum. Think of it as drafting the best rookies for the next season from just Texas or the entire United States. The rookies from the United States are going to be better by default. I mean they include the players from Texas.
To summarize, I believe this is a solid ETF to get S&P 500 exposure and tilt a bit further toward momentum. I don’t think it is a great way to express your confidence in the momentum factor. There is a lot of luck involved whether you actually capture the momentum factor. If I really wanted to add momentum to my portfolio, I’d probably go another way entirely but would definitely diversify across momentum methodologies to mitigate some of the timing luck involved here.
Read the full article here