A variety of factors have received plenty of attention at various points over the course of 2021, but investors looking for a factor idea to close out the year and ride into 2022 may want to consider momentum.
Enter the Invesco S&P 500 Momentum ETF (SPMO), which follows the S&P 500 Momentum Index. Momentum as an investing concept is easily explained. In simple terms, it’s the act of buying a security that’s already significantly appreciated on the belief that it will continue appreciating. Think “buy high, sell higher.” Some market observers are bullish on momentum for the remainder of 2021.
“With fewer than 50 trading days left in 2021, it is time to ‘micromanage’ portfolios into year end. In our view, we are entering a period where irrationality becomes rational, reiterate our ‘melt-up’ scenario, and maintain our 4825 year-end SPX target,” Wells Fargo senior equity analyst Christopher Harvey wrote in a recent note to clients.
The 101 stocks in SPMO’s underlying index receive momentum scores. It’s reasonable to expect that when broader markets are climbing, SPMO could offer the potential for out-performance. Up 22.59% year-to-date and having wrapped up October around all-time highs, SPMO is delivering.
“Contrary to the start of 2021, we now think high Momentum stocks offer an attractive risk/reward into year-end. The Mo’ style has taken on more cyclical characteristics, and valuations have become more attractive,” said Wells Fargo’s Harvey.
The bank screened for stocks that appear attractive on the basis of momentum, according to CNBC. Among the SPMO holdings that appear on that list are Alphabet (NASDAQ:GOOG), Goldman Sachs (NYSE:GS), Ford (NYSE:F), Intuit (NASDAQ:INTU), Tapestry (NYSE:TPR), and PNC Financial Services Group (NYSE:PNC).
On that note, it pays to remember that while many investors associate momentum with tech stocks, the factor is sector agnostic, as is SPMO. 10 of the 11 GICS sectors — utilities is the exception — are represented in SPMO, and tech is merely the fifth-largest.
Financial services is the largest sector allocation in the fund at north of 24%, followed by communication services — Alphabet’s home sector — at 18.30%. Perhaps SPMO’s sector surprise is its 0.7% weight to energy, the best-performing group in the S&P 500 this year.
An almost 40% combined weight to financial services and industrials stocks indicates that momentum can apply to value fare, but SPMO does also allocate about 42% of its weight to stocks with the growth label, according to issuer data.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
