Among the various investment factors, it’s not a stretch to say that growth, size, and value, among others, are easily understood while others, like momentum, are in the misunderstood camp. Many investors think of the factor as a bull market only strategy, meaning they may be apt to gloss over exchange traded funds such as the Invesco S&P 500 Momentum ETF (SPMO) in trying market climates such as the current environment.
However, SPMO, which follows the S&P 500 Momentum Index, is a case study in methodology mattering. Translation: The ETF could prove to be more durable across more market settings than many investors give it credit for. On that note, debunking some of the myths associated with momentum is essential to helping market participants gain greater comfort with this factor.
“While the S&P 500 High Beta Index (‘High Beta’) selects the 100 highest beta stocks from the S&P 500, Momentum selects constituents with top-quintile risk-adjusted price return momentum scores. Resulting differences between High Beta and Momentum indices have historically led to only a 2% overlap and a -0.54 relative return three-year correlation. Performance also underscores the uniqueness of each factor. Just during January 2023, the performance of High Beta and Momentum differed by 17%—their fourth-highest spread since 2010,” noted S&P Dow Jones Indices.
One way of interpreting this is that while there will be occasions when high beta and momentum intersect, these are two distinct concepts, and they aren’t dependent on one another. Said differently, SPMO can deliver on the promise of momentum with a lineup full of high beta stocks or minimal exposure to such names.
As noted above, another frequently mentioned myth is that the factor is dependent on sanguine market conditions to deliver outperformance of pure beta strategies and is vulnerable to more severe lagging in bear markets. Indeed, that is a myth.
“When the S&P 500 declined 18.1% in 2022, the S&P 500 Momentum Index outperformed, falling 10.5%. Curious about Momentum’s resilience, we examined its average excess performance during one-month periods when the S&P 500 was rising or falling,” added S&P Dow Jones.
As the index provider observes, another myth is that the factor can’t be efficiently indexed, meaning that some market participants assume active management is necessary to generate decent returns. Using a momentum score and rebalancing twice per year, the $221.3 million SPMO shows that the factor can work in the passive ETF wrapper. The Invesco fund holds 100 stocks, nearly 60% of which hail from the energy and healthcare sectors.
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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.
