This report offers an in-depth examination of two prominent momentum-focused exchange-traded funds, the Invesco S&P 500 Momentum ETF (SPMO) and the iShares MSCI USA Momentum Factor ETF (MTUM). It concludes that SPMO presents a more compelling investment opportunity due to its superior risk-adjusted returns, higher upside potential, and reduced operational costs. The core distinction lies in SPMO's strategic semi-annual rebalancing approach, which fosters a high-conviction portfolio. In contrast, MTUM's more frequent quarterly rebalancing, while offering adaptability, tends to correlate with increased portfolio turnover and, consequently, a diluted performance. For investors prioritizing strong performance in US large-cap momentum strategies, SPMO is the recommended primary allocation, with MTUM potentially serving as a small complementary holding for diversification purposes.
Momentum investing strategies are designed to capitalize on the market's tendency for assets that have performed well recently to continue performing well. These strategies can provide an adaptive component to an investment portfolio, identifying top-performing companies regardless of broader market conditions. This allows for potential gains during bull markets and could offer a defensive posture when the overall market faces downturns. However, the effectiveness and efficiency of such strategies are heavily influenced by their construction and rebalancing methodologies. The choice between different momentum ETFs often boils down to how they balance responsiveness to market changes with the costs associated with frequent trading.
The Invesco S&P 500 Momentum ETF (SPMO) distinguishes itself through a high-conviction approach coupled with a semi-annual rebalancing schedule. This less frequent rebalancing mechanism reduces transaction costs and allows the selected securities more time to realize their momentum. Historical data suggests that this strategy has led to stronger risk-adjusted returns and a more pronounced upside potential compared to its counterpart. SPMO's focus on a concentrated selection of companies that exhibit strong momentum within the S&P 500 universe ensures that capital is allocated to assets with the most compelling recent performance trends. This selective approach has historically translated into a competitive edge, delivering superior results for investors.
Conversely, the iShares MSCI USA Momentum Factor ETF (MTUM) employs a quarterly rebalancing strategy. While this more frequent adjustment allows MTUM to react swiftly to emerging momentum trends, it inherently leads to higher portfolio turnover. Increased turnover can result in higher trading costs, which eat into returns, and may not always translate into better performance. In fact, analysis indicates that MTUM's performance has generally lagged behind SPMO, often exhibiting similar or even higher levels of volatility. Despite this, MTUM can play a role in a diversified portfolio by offering a different angle of exposure to momentum, particularly for investors looking to mitigate concentration risks that might arise from SPMO's more focused strategy.
Ultimately, the decision between SPMO and MTUM depends on an investor's specific goals and risk tolerance. For those primarily seeking a robust, cost-efficient exposure to US large-cap momentum with a track record of strong performance, SPMO stands out as the superior option. Its disciplined, less frequent rebalancing cycle aligns with a strategy that allows momentum to mature, benefiting from reduced trading friction. While MTUM provides a viable alternative for diversification or for investors preferring a more agile, albeit potentially costlier, approach to momentum, it is best considered a supplementary investment rather than a primary holding in a momentum-centric portfolio.