SPMO: I hope you love technology (NYSEARCA:SPMO)

Momentum investing refers to a strategy that relies on the fact that both individual stocks and entire funds tend to continue performing once they have performed. Momentum is well documented and works, so if it works, why not be leaner? by focusing only on stocks with momentum and getting rid of those that don’t? Well – that’s what the Invesco S&P 500 Momentum ETF (NYSEARCA:SPMO) does that. The fund tracks the S&P 500 Momentum Index, which invests in the 100 most dynamic stocks in the S&P 500. Its portfolio is rebalanced twice a year.

The fund’s approach is based on the idea that by investing in companies with the strongest uptrends that are most likely to sustain their outperformance, it can leverage persistence for additional performance enhancement. By rebalancing the portfolio to maintain momentum with the best performing With its focus on equities, SPMO aims to give investors the opportunity to participate in market leaders while avoiding the pitfalls of stock picking.

A look at the stocks

The fund currently holds 101 holdings. The largest holding, Nvidia (poster child of momentum), makes up 13.17% of the fund. Yes, folks – if you wanted a momentum fund, this momentum fund should have Nvidia at the top.

All of the holdings listed here are well-known companies that just have a higher overall weighting than in broader passive benchmarks like the S&P 500 itself. I would argue that the fund has been so successful because of the names it is included in, with the twice-yearly rebalancing frequency allowing momentum to build in some of these high-flyers.

There are good arguments so far, but the problem with momentum investing is that it can get ugly when the tide turns. That obviously hasn’t happened yet, but it’s worth thinking about given how concentrated the top 10 names are.

Sector composition

The high-growth, innovative companies that SPMO focuses on also drive the fund’s high exposure to the information technology sector. Nearly 52% of the fund is in the technology sector, followed by 12% consumer goods and nearly 10% communication services. This heavy exposure to the technology superstars – Nvidia, Microsoft and Apple, among others – is no surprise. We all know how concentrated Mag 7’s performance has been compared to everything else, and we all know that the technology sector has been the only place to be from a momentum perspective since late 2022.

Advantages and disadvantages

Consistently holding the best-performing stocks looks like a win on paper—but should investors expect momentum or chaos with SPMO? On the positive side, momentum investing seems to work. Since the Dow Jones index was first calculated, price trends have tended to last much longer than a random walk would predict. By continually rebalancing stocks, a momentum ETF like SPMO can surf on market leaders, which in turn should improve returns.

The problem is that momentum tends to have momentum crashes that seem to come out of nowhere when they happen. Following this strategy will put you on a slippery slope because of this risk. It’s easy to think that hot stock performance will continue, but eventually you’ll have overinvested in yesterday’s hot stocks, just like everyone else. You’ll miss out on investing in the stocks that will actually do well tomorrow. That’s the joke about momentum. You need momentum for momentum to happen.

Additionally, because SPMO has a large exposure to the technology sector, this fund is particularly vulnerable to a downturn there. I know it’s hard to imagine a scenario where the technology sector falters, but it was also hard to imagine the technology sector turning around in the early 2000s. The point is that there is a significant risk here that, while it works, could reverse and end badly.

Diploma

If you are looking to invest in a momentum portfolio in the large-cap U.S. equity market, the Invesco S&P 500 Momentum ETF could be an attractive way to generate momentum returns. Its portfolio is dynamically managed to contain the highest momentum stocks within the S&P 500. However, investors need to be aware that there is a potential for sharp reversals and periods of underperformance due to the inherent risk of the momentum strategy. In addition, the concentrated sector holding in the SPMO will lead to an increase in volatility and company-specific industry risks. Personally, I would be afraid to invest in it now, given the duration of the fund. Still – it is worth keeping an eye on.

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