This 1 momentum ETF is still beating the S&P 500 with lower drawdowns

It shouldn't be possible to outperform the S&P 500 time and time again without getting hit by downturns as hard. However, the Invesco S&P 500 Momentum ETF (NYSEARCA:SPMO) should make you think otherwise. Obviously, SPMO is unlikely to continue outperforming the SPY forever or become a default for investors, but it is still worth looking into given how solid it has been.

SPMO has delivered 537% in gains in the past decade, whereas the SPY has delivered 306%. Over the five-year period, the SPMO has delivered nearly double the S&P 500's gains. And each downturn over the past five years saw the SPMO stay neck-and-neck with the S&P 500, or even outperform it at times.

Only in the past month has the SPY outperformed the SPMO, but this may not last, as the SPY is declining to close the gap.

What SPMO does to perform so well

SPMO essentially just holds the winners. The theory is that winners keep winning, so it uses the S&P 500 Momentum index to pick the 100 highest-scoring stocks in the S&P 500. It rebalances twice a year, and the formula has been working well during this AI rally.

All of its stocks are in the S&P 500, so the ETF remains invested in solid businesses without leaning too aggressively on momentum.

You pay a 0.13% expense ratio, or $13 per $10,000.

It's more expensive compared to the VOO or the SPY, but the fee is still marginal.

How SPMO keeps outperforming even during downturns

It has always been a winner's market, but the gap between winners and losers has only widened in the past few years. Tech stocks on a winning streak have a remarkable tendency to keep winning. This has allowed SPMO to keep beating the S&P 500 and even the Nasdaq-100 year after year. It simply holds a concentrated basket of outperformers the market keeps on rewarding.

What's surprising is that these holdings haven't declined as much during market downturns. I'd attribute this to SPMO holding the top 100 highest-performing stocks in the S&P 500. Yes, it does have more exposure to large tech stocks, but picking so many S&P 500 stocks also adds some safety, specifically from businesses with healthy financials.

The rebalancing is also quick enough that each time a stock turns into a loser or stalls, the ETF can move out and rotate into a winner in time. It has been a recurring theme: soaring tech stocks like Nvidia (NASDAQ:NVDA) and Palantir (NASDAQ:PLTR) stall for a few months before undergoing a sharp correction. This gives SPMO time to exit stocks that are losing their luster, while the S&P 500 holds on to them.

Should you buy the SPMO now?

SPMO is unlikely to perpetually outperform the S&P 500. That said, if you are confident the broader AI rally will continue, it's a good idea to buy and hold this as a satellite investment. As long as the broader market keeps rallying, SPMO should continue to deliver.

The biggest risk you have here is if the stock market sells off in tandem and does so very sharply. Since SPMO holds stocks with the most momentum, a sharp reversal like that will cause SPMO to decline much more if the crash is severe enough. Worse, if the crash happens just after a rebalancing, it will take SPMO 6 more months to exit these losing names. But again, you need a very unlucky series of events to line up perfectly to hurt SPMO.

Admittedly, SPMO also remains untested against a true recession. If you are going to buy, remember that you cannot buy and hold this through multiple market cycles. Holding the top 100 "momentum" stocks in a market that does not have any momentum to offer has not been tested previously.

Regardless, if you think the bears are wrong and the bull market has a year or two to rally before anything breaks, consider buying.

Contact [email protected] for any questions or corrections.