This Nvidia-heavy investing strategy has been outperforming the S&P 500

By Philip van Doorn

A low-cost index strategy tracking stocks with the highest risk-weighted returns has fared well during a period of high inflation and 'clear, defined leadership' for the technology sector

Exchange-traded funds that track indexes can work well for investors because they can ride along with rising markets with low fees that enhance long-term returns. And it is difficult for active managers to match or outperform a broad index such as the S&P 500, in part because of their high fees. But the straight index-tracking approaches can be modified by various factors.

An example of a passive ETF approach that has fared well during this period of high inflation has been the Invesco S&P 500 Momentum ETF SPMO. This fund currently holds 99 stocks of companies within the benchmark S&P 500 SPX that have the highest "momentum scores." The portfolio is reconstituted and rebalanced twice a year on the third Fridays of March and December.

The portfolio is weighted by momentum score and market capitalization. Twice annually the components of the S&P 500 are ranked by how much their prices have risen over the previous 12 months, and then scored to take volatility into account. The portfolio is made up of the 20% of companies in the S&P 500 that score highest, and then weighted by a combination of the momentum score and market capitalization.

So the stock selection is based "on strong risk-adjusted performance," according to Nick Kalivas, who heads Invesco's factor strategy for exchange-traded funds.

This approach "is not based on fundamental analysis or a human interpretation of what is happening with a company," Kalivas emphasized during an interview.

He went on to say that this particular factor (risk-adjusted momentum) tends to fare well during times when the consumer-price index is higher than economists expect.

But on a different note, he said that the risk-adjusted momentum approach "prospers during periods when there is clear, defined leadership in the marketplace." And that points to the fund's current weighting, which is 48.7% in the information technology sector, compared with a 28.9% weighting for the SPDR S&P 500 ETF trust SPY, which tracks the S&P 500.

"If there is a change in leadership, momentum can get chopped up," he said. But he went on to say that the Invesco S&P 500 Momentum ETF's strategy, because of its volatility-scoring, could be a defensive strategy at times.

If you are looking to keep the lid on investment management fees and believe that inflation may remain stubbornly high or that the AI-driven tech dominance of the stock market is likely to continue, this momentum strategy is one for you to consider.

Performance comparison

The Invesco S&P 500 Momentum ETF was established in September 2015. Here is a comparison of the fund's average total returns for three and five years, and total returns for individual years, with those of the SPDR S&P 500 ETF Trust:

   ETF                            Ticker   Avg. return - 3 Years  Avg. return - 5 Years  2024 return through May 21  2023 return  2022 return  2021 return 
   Invesco S&P 500 Momentum ETF    SPMO                    16.2%                  17.2%                       24.5%        17.5%       -10.5%        22.9% 
   SPDR S&P 500 ETF Trust          SPY                     10.2%                  15.0%                       12.1%        26.2%       -18.2%        29.1% 
                                                                                                                                           Source: FactSet 

Returns include reinvested dividends and are after expenses, which total 0.13% of assets under management annually for SPMO and 0.0945% for SPY.

It is interesting to see that following SPY's outperformance during 2021, SPMO fared better during the broad market decline (led by the information-technology sector) in 2022.

Top holdings

Here are the top 10 holdings of the Invesco S&P 500 Momentum ETF with their portfolio weightings, along with the stocks' weightings in the SPDR S&P 500 ETF Trust:

   Name                                Ticker   % of SPMO portfolio  % of SPY portfolio 
   Nvidia Corp.                         NVDA                  10.5%                5.3% 
   Apple Inc.                           AAPL                   9.2%                6.2% 
   Microsoft Corp.                      MSFT                   9.0%                7.1% 
   Meta Platforms Inc.                  META                   8.3%                2.3% 
   Amazon.com Inc.                      AMZN                   7.8%                3.7% 
   Broadcom Inc.                        AVGO                   5.1%                1.4% 
   Eli Lilly & Co.                      LLY                    4.9%                1.4% 
   Berkshire Hathaway Inc. Class B     BRK.B                   3.7%                1.7% 
   JPMorgan Chase & Co.                 JPM                    2.4%                1.3% 
   Costco Wholesale Corp.               COST                   2.2%                0.8% 
                                                      Sources: Invesco and State Street 

That is a hefty weighting of 63.2% for the top 10 holdings of the Invesco S&P 500 Momentum ETF. Within the SPDR S&P 500 ETF Trust, the top 10 companies (including two common-share classes for Alphabet Inc. (GOOGL) (GOOG)) make up 34.7% of the portfolio. Aside from Alphabet, there is one more difference in the top 10 holdings for the two funds, which is that Costco Wholesale Corp. (COST) isn't among SPY's top 10 holdings.

Invesco has ETFs following similar strategies for smaller companies. These are the Invesco S&P SmallCap Momentum ETF XSMO and the Invesco S&P MidCap Momentum ETF XMMO.

Don't miss: Nvidia's stock is a bargain - provided this pattern continues

-Philip van Doorn

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05-25-24 1041ET

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