SPMO: Can Momentum Outpace the Headwinds?

The Invesco S&P 500® Momentum ETF (SPMO) has emerged as a standout performer in 2025, with its YTD return of 11.26% handily outpacing the broader S&P 500's 1.06%. But as macroeconomic clouds gather, investors are asking: Can this momentum-driven strategy sustain its pace? Let's dissect the ETF's mechanics, sector exposures, and the macro factors now shaping its trajectory.

The Momentum Strategy: A Formula for Success—or Risk?

SPMO tracks the S&P 500 Momentum Index, which selects the 100 stocks with the highest “momentum scores.” These scores are calculated by measuring price performance over the past 12 months (excluding the most recent month) and adjusted for volatility. This dual focus on trend strength and stability ensures the ETF avoids overly volatile stocks, mitigating some risks inherent in pure momentum strategies.

The semi-annual rebalancing (March and September) keeps the portfolio dynamic, pruning lagging stocks and adding fresh winners. This turnover helps SPMO stay aligned with prevailing trends, a key reason for its 17.48% annualized return since inception. But momentum strategies are not without pitfalls. They can amplify losses in range-bound or declining markets, where past winners may falter.

Sector Allocations: A Tech-Financials Double Play

As of June 2025, SPMO's top sectors are Information Technology (22%), Financials (20%), and Consumer Discretionary (16%). This reflects a significant shift from October 2024, when Financials led at 23% and Healthcare held 11%. The current allocations highlight a heavy bet on sectors with strong recent price momentum:

• Tech Dominance: NVIDIA (9.9%) and Meta (8.9%) anchor the portfolio, benefiting from AI-driven demand and cloud infrastructure spending.
• Financials Resilience: JPMorgan Chase (5.1%) and other banks profit from high interest rates, though this tailwind may fade if the Fed cuts rates further.
• Consumer Discretionary Surge: Amazon (8.5%) and retailers like Williams-Sonoma (not listed in top holdings but part of the sector) reflect optimism around consumer spending.

This concentration is a double-edged sword. While it amplifies gains during bull runs, it also exposes investors to sector-specific risks. For instance, a tech sell-off or a financials slowdown could destabilize returns.

Macroeconomic Crosscurrents: Challenges Ahead

The ETF's performance hinges on three critical macro trends:

1. Global Trade Tensions and Tech Supply Chains

The Technology sector, which makes up 22% of SPMO, faces headwinds from U.S.-China trade disputes. Tariffs on semiconductors and components could disrupt supply chains, raising costs for firms like NVIDIA and Broadcom. Geopolitical risks, such as export restrictions or intellectual property disputes, threaten the sector's momentum.

2. Interest Rate Dynamics and Financials

Financials (20%) thrive in a high-rate environment but face risks if the Fed pivots to rate cuts to combat slowing growth. While lower rates might boost consumer borrowing, they compress banks' net interest margins. Additionally, rising debt delinquencies could strain loan portfolios.

3. Consumer Discretionary's Balancing Act

Consumer Discretionary (16%) depends on resilient spending, which is under pressure from high inflation and elevated debt. Companies like Amazon and Starbucks must navigate value-seeking consumers and supply chain bottlenecks. A housing market recovery could boost home-related discretionary purchases, but this sector remains vulnerable to economic softness.

Key Risks to Monitor

• Sector Overconcentration: SPMO's top 10 holdings account for 65% of assets, magnifying exposure to sector-specific downturns.
• Momentum Volatility: The strategy's reliance on past performance means it may underperform in choppy markets or prolonged corrections.
• ESG Concerns: With an ESG score of 6.52/10, the fund faces scrutiny over its involvement in controversies like labor practices and governance issues.

Investment Outlook and Recommendations

SPMO remains a compelling play for investors who believe in the staying power of tech innovation, financial resilience, and consumer spending. Its low 0.13% expense ratio and semi-annual rebalancing offer a cost-effective way to capture momentum-driven gains.

However, the ETF's success in the second half of 2025 hinges on three conditions:
1. Tech Sector Stability: Resolve trade disputes with China to avoid supply chain disruptions.
2. Interest Rate Path: A gradual Fed easing that doesn't trigger a sharp economic slowdown.
3. Consumer Resilience: Sustained spending despite debt and inflation pressures.

Actionable Takeaway:
- Hold for Momentum Bulls: Investors with a high-risk tolerance and a 1–3 year horizon can maintain exposure, especially if they expect tech and financials to dominate earnings growth.
- Tread Carefully: Avoid overallocating to SPMO if you foresee a macroeconomic downturn or a tech-led correction. Pair it with defensive assets or use it as a satellite holding within a diversified portfolio.

Final Word

SPMO's performance to date is a testament to the power of momentum investing. Yet, as 2025 progresses, the ETF will need more than past trends to sustain its pace—it will require a favorable macro backdrop and sector resilience. For now, it's a buy for growth-oriented portfolios, but investors must stay vigilant on geopolitical and economic developments.

Invest wisely.