SPMO ETF: Heavy Into TMT Stocks After The March Reconstitution (NYSEARCA:SPMO)

The momentum factor has taken a breather in the last month and a half. It surged out of the gates in 2024, powered higher by overweights to the ongoing AI theme and broader semiconductor-stock surge. Also helping the strategy which seeks to pounce on what has been winning was general outperformance by large-cap growth despite small caps catching a relative bid off the October 2023 low. Let’s dig into where momentum may go from here.

I have a hold rating on the Invesco S&P 500 Momentum ETF (NYSEARCA:SPMO). The fund focuses on domestic large caps, so I don’t feel it captures the top potential global equities, namely ex-US stocks and Chinese equities, which have outperformed the US market since mid-January, and domestic SMID caps.

ETF Performance Heat Map Last 3 Months: Some Strength Overseas Emerging

According to the issuer, SPMO is based on the S&P 500 Momentum Index. The ETF generally will invest at least 90% of its total assets in the securities that comprise the index. The index tracks the performance of stocks in the S&P 500 Index that have a high “momentum score”. The fund and index are reconstituted and rebalanced twice a year on the third Fridays of March and September. Constituents are weighted by their market capitalization and their momentum score. SPMO is currently ranked no. 1 in its ETF Sub Class by Seeking Alpha.

SPMO is a small ETF with just $1.16 billion in assets under management as of May 2, 2024. It is an efficient and low-cost way to access the momentum factor among S&P equities given its 0.13% annual expense ratio. The ETF currently pays a below-market 1.11% trailing 12-month dividend yield (the SPX yield is closer to 1.4%). SPMO features a solid risk rating – it currently is highly weighted in firms with quality balance sheets that produce solid free cash flow.

Share-price momentum has been stellar lately, helping to vault the fund to the top of its ETF sub class. Liquidity is also healthy given average daily volume of more than 330,000 shares but I noticed that its median 30-day bid/ask spread is a high 15 basis points, so I encourage investors to use limit order during the trading day, and you might find better liquidity during the final 10 minutes of the trading day.

Looking closer at the portfolio, the 3-star, Bronze-rated fund by Morningstar plots on the very upper-right section of the style box. With such a big position in large-cap growth, SPMO is a sly bet on that area of the market continuing to dominate. The major risk is if we see more outperformance from small caps (which have led off the October 2023 low) or if the near-term alpha from ex-US equities persists.

Also consider that SPMO’s price-to-earnings ratio is high at more than 28, but long-term earnings growth is sublime at more than 18%. What’s more, the current allocation may be able to weather volatility given high earnings quality in terms of its factor score there.

SPMO: Portfolio & Factor Profiles

SMPO is an active wager on the Information Technology and other tech-related stocks leading, as has been the broader theme over the past 13 years. If you are bullish on oil and the Energy sector, you might want to hold off on the ETF for now – Energy is just 0.6% of SPMO and the Materials sector is less than 2%.

SPMO: Holdings & Dividend Information

Seasonally, SPMO has tended to rally well into the summer. Gains have been had through August, so that augers well for this factor-based ETF over the months ahead.

SPMO: Bullish Seasonal Trends Through August

The Technical Take

Amid the recent market pullback following the March 28 peak, momentum has wavered. Notice in the chart below that SPMO recently notched a 13-month low on the RSI momentum oscillator. That downside move coincided with a breakdown below the short-term 50-day moving average. The long-term 200dma, however, is way down at $66, some $10 under the latest share price. Another price point of interest is an old gap down near the $70 mark – keep your eyes on that if we see Q2 and Q3 weakness ensue. Recall last year that equities, particularly large-cap growth shares, came under pressure from late July 2023 through mid-October.

For now, though, SPMO has seen an influx of volume. Take a look at the volume by price indicator on the left side of the graph. You will see that there is now a high amount of shares traded in the $74 to $81 range, so this current zone could actually be a bit sticky based on my interpretation of that indicator.

Overall, the uptrend off the Q4 low has broken, suggesting near-term choppy price action after SPMO touched deeply oversold conditions.

SPMO: Uptrend Broken, Eyeing A Gap Fill and Rising 200dma Support

The Bottom Line

Following SPMO’s reconstitution and rebalance in March, investors in the strategy will hold a high amount of US large-cap growth stocks at least until the September reconstitution. I have a hold rating on the ETF as there are emerging areas of relative strength around the world that this fund would miss out on. Also, SPMO’s valuation is lofty while the technical chart shows signs of near-term weakness.