SPMO: A Momentum Play for Bull Markets, but Caution for the Long Run

The S&P 500® Momentum ETF (SPMO) has emerged as a sharp tool for investors seeking to ride the waves of momentum-driven markets, capitalizing on the relentless climb of high-flying stocks. With a YTD return of 12.73% as of June 2025 and a 33.68% surge in 2024, SPMO's performance underscores its tactical advantage in environments where price momentum reigns supreme. However, its concentrated tech tilt and volatility risks demand strategic use. Let's dissect its strengths, risks, and where it fits in today's market.

The Momentum Edge: How SPMO Captures the Fastest Gainers

SPMO tracks the S&P 500® Momentum Index, which selects the top 100 stocks from the S&P 500 based on their 12-month price performance, rebalanced semi-annually. This strategy amplifies exposure to high-momentum names, such as NVIDIA (12.91% of holdings) and Apple (9.37%), which have powered its returns. The fund's 65.38% concentration in its top 10 holdings creates a laser focus on outperformers, but this comes at the cost of diversification.

The ETF's 0.13% expense ratio—nearly half the 0.59% average for its peer group—adds to its appeal. Over the past year, SPMO delivered a 60.74% return, far outpacing the S&P 500's 27.59% gain. This outperformance isn't a fluke: its 3-year annualized return of 24.38% and 5-year return of 21% reveal a consistent tilt toward growth and tech.

The Case for Tactical Use: Riding the Bull, Not the Bear

SPMO's strength lies in its ability to amplify returns during bull market euphoria, when momentum strategies thrive. Its $1.44 billion in 1-year net inflows reflect investor confidence in its capacity to capture this dynamic. The fund's semi-annual rebalancing ensures it stays anchored to the latest price leaders, a key advantage over static indices.

But investors must be wary of its high volatility—a 10.42% standard deviation—and sector bias. Over 49% of assets are in tech, with 96.95% in U.S. equities. This concentration amplifies gains in growth-friendly environments but leaves it vulnerable to sector-specific downturns. The ESG score of 6.52/10 also suggests limited focus on sustainability, a risk as ESG integration grows in importance.

Risks and the Drawbacks of Buy-and-Hold

While SPMO shines in momentum-fueled rallies, its risks are stark:
1. Sector Overconcentration: A tech crash or regulatory crackdown (e.g., AI regulation) could trigger sharp declines.
2. Momentum's Cyclical Nature: The strategy underperforms in sideways or declining markets, as seen in corrections where high-flying stocks falter.
3. Volatility Drag: Its 1.42% standard deviation exceeds the S&P 500's 0.86%, making it less suitable for risk-averse portfolios.

The Investment Thesis: Tactical Deployment, Not a Core Holding

SPMO is best deployed as a tactical overlay in a portfolio, not a buy-and-hold core position. Here's how to use it wisely:
- Momentum Rotations: Allocate a portion (e.g., 10-15%) to SPMO during market upswings, particularly in tech/growth cycles.
- Rebalance Cyclically: Use its semi-annual rebalance dates (June/December) to assess whether momentum remains dominant or if value/defensive sectors are gaining traction.
- Pair with Diversifiers: Offset its tech bias with exposure to sectors like energy or utilities to mitigate volatility.

This disciplined rebalancing approach has proven effective historically. From 2020 to 2025, buying SPMO on its semi-annual rebalance dates and holding until the next rebalance delivered a 17.08% compound annual growth rate (CAGR) and a 6.78% excess return over the S&P 500, with a maximum drawdown of -13.56%. While the 0.64 Sharpe ratio reflects risk-adjusted gains, investors must account for the strategy's volatility. Pairing this with periodic sector checks (e.g., tech valuation multiples, macroeconomic trends) further refines the strategy's timing.

Conclusion: A Sharp Knife, But Use It Wisely

SPMO is a potent tool for investors seeking to profit from momentum-driven markets, especially when tech and growth stocks are in favor. Its low cost and disciplined strategy make it a standout tactical option. However, its high volatility and sector concentration demand vigilance—this isn't a “set it and forget it” ETF. For the right investor, timing, and portfolio mix, SPMO can amplify gains in bull markets. Just remember: momentum is a sprint, not a marathon.