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While I am satisfied with my current investments and have not made any significant changes in several years I do occasionally evaluate alternatives. I recently read a Morningstar article titled “Top-Performing Stock ETFs of the Quarter”. Most had higher expenses than I would be comfortable with. But several were low-cost, including Invesco S&P 500 Momentum ETF SPMO at 0.13% expense. This ETF tracks the S&P 500 Momentum Index. This got me looking into what “momentum” investing was all about. I downloaded a fact sheet and momentum methodology document from the spglobal web site. I skimmed through the methodology document but frankly it only confirmed that I do not know what I do not know. But the performance of the SPMO ETF kept me looking. The recent performance has been outstanding, with a more than 45% return in 2024, which has continued into this year. And when compared to a standard S&P 500 fund the downside is better (it lost less than 11% in 2022 compared to the S&P 500 loss of 18%). But for most it’s almost 10 year history the index and ETF tracked the S&P 500 providing only slightly better returns. But, about a year and a half ago the momentum strategy seemed to diverge and is now returning significantly better returns. The question is why? Has the strategy been improved? Is it now AI controlled? I have not found answers. At this point, I am not ready to make any changes, especially since after more than 18 months of above normal performance it could be close to topping-out. I am wondering what the HumbleDollar community thinks about momentum investing and why it seems to be doing so well right now.
This reminds me of “past performance is no guarantee of future performance”.
Before 1976, portfolios were constructed by stock picking only, assuming good stock selection counts for all the returns. Academic research from 1950- 1960s showed a systemic way to construct a portfolio to balance risk and return (many Nobel prizes were awarded to the economists who published such theories / models). The arrival of computer allowed a practical way of such portfolio construction and thus the 1976 launch of Vanguard index mutual fund. The rest they say is history with the popularity of passive index investing putting many active stock pickers out of job. But history is not done. Later research found many market factors that could explain over 95% of portfolio returns. Momentum investing is based on factor-based investing. Instead of investing the whole market without regards why the market fluctuates, factor-based investing posits that some factors are better than others in each different market environment. Now the public can choose passive index, or active management, or factor-based investing.
Briefly, 5 factors that drive a portfolio return are: market beta, size,
value, momentum, profitability & quality. Invesco SPMO ETF tracks momentum factor only for its highest risk adjusted return of all the factors. There is no “free lunch” because when the market reverses, momentum investing becomes “free fall”. In April 2025, SPMO declined 12% from peak to trough, while Vanguard S&P500 ETF VOO declined about 9%.
Do 5-factor portfolios perform better than market-weighted index portfolio? It depends on market cycles and implementation techniques. Many fund advisors seem to concur that factor-based investing is too sophisticated for individuals while delivering only a marginal risk-adjusted advantage over the market weight index portfolio.
Thanks for your very informative reply. For now I am just “window shopping” and will not change my investments. I prioritize low expense, and do not invest in something unless there is enough history (10-year minimum) to get some feeling for how an investment may perform under various market conditions. One of my spreadsheets is the annualized performance of all my investments (mutual funds and ETFs) going back to inception, 1998 to 2012 in my case. So I can estimate how my current portfolio would have performed during the dot-comm bust or great recession, and know for sure it’s performance since 2012.
yw. You may be interested in learning more about how factor-based investing did or did not beat the market indexes in the March 2025 YouTube video presented by a Canadian financial advisor firm PWL Capital (this firm does not cater to US investors by regulation).
YouTube Ben Felix “Dimensional (DFA) vs. Vanguard”
The video presented 20 years of data comparing the performance of Dimensional Fund Advisors (DFA) mutual funds (factor-based investing) to Vanguard mutual funds (indexes) – 84% of DFA funds outperformed benchmarks over 20 years compared to 17% of the industry mutual funds. Vanguard funds simply tracked the benchmark, not beating it. DFA launched a full suite of ETFs since 2020 for US investors, when SEC allowed any existing mutual fund to convert into an ETF.
On the topic of fund expenses, watch the YouTube video by Ben Felix “The Problem with Index Funds”
In brief, index funds suffer additional costs beyond low fund fees due to their rigid index tracking transactions: price impact, mean reversion, and adverse selection.
(Birth of indexing story removed, following Jonathan’s caution below)
There are other funds and ETFs that use factor-based investing in addition to DFA and Invesco. A member of DFA went on to establish Avantis Investors with factor-based ETFs in 2019 and became one of the fastest growing fund companies (per Morningstar 2024).
I would caution against accepting anybody’s version of the “birth of indexing” story. It’s a child whom many want to claim as their own and, amid the stampede, I fear the truth has been the victim.
Jonathan your last sentence reminds me of the great saying, “victory has many fathers, but defeat is an orphan.”
I’m outside the comfort of my wheelhouse here, but I know the Magnificent Seven were up about 60% in 2024. I wonder what will happen to the momentum funds if and when these stocks lose their luster.
The S&P 500 Momentum Index and SPMO ETF contain 100 holdings but do not appear to be any more concentrated than the S&P 500 itself. In fact, for the largest sector, information technology, the S&P 500 index is at 31% and the momentum index is only 22%.
I am wondering if the recent performance increase could be due to a self reinforcing feedback effect; when a stock appears on a momentum index it tends to increase the price of the stock. If more people, or bots, are using momentum strategy than in prior years that could be a factor. Is there a momentum bubble?
I think the best way to capitalize on momentum is avoiding frequent rebalancing. Jonathan wrote about this recently here:
https://humbledollar.com/forum/rethinking-rebalancing-by-jonathan-clements/
If you want an alternative to diversify your income and growth returns through varied economic times, have you looked at REIT funds like Vanguard’s VNQ?
Thanks for the suggestions. Yes, a REIT fund could add some diversification to my broad market and sector index funds. And yes, by not selling winners to rebalance it keeps the momentum going.