Exchange-traded funds (ETFs) are having a strong performance this year, with most of them having robust inflows. Some of the most notable ones in terms of inflows are the Vanguard S&P 500 (VOO) and the iShares S&P 500 (SPY) ETFs.
Growth-focused investors have numerous options available to them. The most popular ones are those that track the Nasdaq 100 index like Invesco QQQ (QQQ) and the tech-focused SPDR Tech ETF (XLK).
This article explains why the Invesco S&P 500 Momentum ETF (SPMO) is a good alternative to those tracking the S&P 500 like the VOO and the SPDR S&P 500 Fund (SPY).
What is the SPMO ETF?
The SPMO is a popular ETF that tracks the S&P 500 Momentum Index, which looks at companies in the S&P 500 index that have shown momentum. In this, the fund looks at companies that have done well in a certain period. It is reconstituted twice a year.
Historically, momentum stocks tend to do well and outperform their peers. This is mostly based on the principle of trend-following, which argues that an asset in an uptrend will continue rising until it meets some resistance.
It is also based on the idea that buying undervalued companies is not always the right thing. For example, highly overvalued companies like Nvidia, Visa, and Mastercard have a long track record of beating their undervalued peers.
It also explains why technology stocks, which trade at a substantially high multiple, have historically done better than real estate and energy companies.
The SPMO ETF is made up of 99 companies and has an expense ratio of 0.13%, making it a fairly cheap fund. Its companies are across all sectors, with technology, consumer discretionary, and communication being the biggest.
The fund owns some of the biggest companies in the United States. Nvidia is its biggest constituent followed by Apple, Meta Platforms, Microsoft, and Amazon.
SPMO beats the S&P 500
The most notable aspect of the SPMO ETF is that it has a long track record of beating the S&P 500 index.
It has risen by 28% this year while the VOO and SPY ETFs have jumped by less than 14%. The same outperformance goes way back as its price return in the last five years stood at 104% compared to S&P 500’s 81%.
This performance happens because the SPMO ETF is more biased towards technology companies while the S&P 500 index is a broader financial asset.
There is a catch
Still, there is a catch that you need to know when you are investing in the SPMO ETF. First, it is a more expensive ETF than the VOO and SPY. It has an expense ratio of 0.13% while VOO and SPY have ratios of 0.03% and 0.09%, respectively.
Additionally, it has a higher P/E multiple than the S&P 500 index. It has a trailing price-to-earnings ratio of 29.56 and a forward multiple of 28. The S&P 500 index has a trailing P/E ratio of 26 and a forward ratio of 22.
The biggest catch is how it is made up. The technology sector accounts for a whopping 48% of the SPMO ETF while consumer discretionary and communication have 10% each. This means that three sectors account for 68% of the entire fund.
VOO, on the other hand, is a more diverse fund. Tech stocks account for 31.40% of the entire fund followed by financials and healthcare which have 13% and 11%, respectively.
The risk of its concentration is that it could suffer deeper dives when there is a major downturn in the tech sector. Fortunately, its annual performance shows that it beats the VOO fund when this happens. SPMO’s total return in 2022 was minus 10.46% compared to VOO’s minus 18%. It also dropped by minus 1% in 2018 when the VOO fund fell by 4.50%.
Alternatives to SPMO ETF
Therefore, to a large extent, we see that the SPMO ETF is a better fund to invest in than the VOO fund. Still, there are other tech-oriented funds that beat it. The most popular one is the Invesco QQQ fund, which tracks the Nasdaq 100 index.
The other one is the SPDR Technology ETF, which holds the biggest tech companies in the United States. As shown below, the QQQ and XLK ETFs have a long history of beating the S&P 500 index funds like VOO and SPY. XLK has jumped by over 150% in the past five years, beating the QQQ, which has risen by 134%.
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