Investors have been rotating into low volatility, value funds all year, possibly leaving their portfolios underexposed to the momentum factor.
Momentum is the tendency for stocks that have performed well in the recent past to continue to perform well in the future – at least near term. The momentum factor tends to be negatively correlated to certain factors, including size and value, which have seen significant inflows this year as investors look to mitigate the increased volatility.
The Invesco S&P 500 Momentum ETF (SPMO) is an ideal fit for investors looking to round out their portfolios with a tactical tilt toward momentum stocks. SPMO tracks an index of the 100 stocks in the S&P 500 that have had better recent price performance compared to its peers. The methodology measures the percentage change in stock prices over the past year, excluding the most recent month, and then adjusts for volatility. The portfolio is then weighted based on a combination of company size and momentum score.
SPMO is an ideal pairing for the Invesco S&P 500® Equal Weight ETF (RSP), a core equity holding that tilts towards smaller size and value. To maintain equal allocations to every security, RSP buys relative losers and sells relative winners at each quarterly balance, making it an anti-momentum type of strategy.
A momentum strategy, on the other hand, is doing the opposite – it’s latching on to what is performing well, according to Nick Kalivas, head of factor and core equity product strategy, ETFs, and indexed strategies at Invesco.
Kalivas said historically, the excess return correlation between momentum and value has tended to be negative, making the funds an ideal pair in a portfolio.
Invesco also offers a small-cap momentum ETF, the Invesco S&P SmallCap Momentum ETF (XSMO). The fund tracks an index comprising 120 securities in the S&P SmallCap 600 Index that have the highest “momentum scores,” calculated under the index methodology. which are computed by measuring the upward price movements of each security as compared to other eligible stocks within the S&P SmallCap 600 Index, according to Invesco.
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