On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the Invesco S&P MidCap Momentum ETF (XMMO) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF.

Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week!

Welcome to the ETF of the Week, where we examine trending, newsworthy, unique, and intriguing exchange-traded funds with Todd Rosenbluth. He’s the head of research at VettaFi. And if you go to VettaFi.com, you will find a full suite of tools that you can use to make yourself a better investor in exchange traded funds. Todd Rosenbluth, it’s great to chat with you again!

Todd Rosenbluth: It’s great to be back, Chuck!

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The Invesco S&P MidCap Momentum ETF. XMMO.

Chuck Jaffe: XMMO, the Invesco S&P MidCap Momentum ETF. Interesting choice, Todd, because we have seen smaller and midcap companies pick up a little bit of steam, but it’s been a market that’s been driven by the biggest names. So, why this ETF now?

Todd Rosenbluth: So, you’re right. It caught my eye that small- and midcaps started to bounce back in the last few weeks. So, I took a closer look to see what midcap ETFs were actually doing quite well. And XMMO was the perfect example for that. This is the momentum version for midcaps. So I think we’ve actually talked about SPMO, about six months ago.

That’s the Invesco S&P 500 Large Cap Momentum ETF. Same investment approach: relative strength. I know you and the listeners love relative strength and moving averages. This takes that into account to sort through the midcap universe. And it’s up, I think it was up 11% through the first 10 months of the year. And I think it’s continued to be a significant outperformer for a more traditional index-based approach to midcap investing. So, I thought it was worth diving in closely.

Chuck Jaffe: Talk a little bit about how they measure relative strength, how they’re looking at momentum, and how this portfolio compares to, say, just a straight-up ordinary S&P midcap.

Todd Rosenbluth: So, a couple of things there. You’re right. This is using relative strength. This is an ETF that rebalances semiannually. The last time it rebalanced was at the end of September.

So, right now we’ve got a pretty clean portfolio that will stay entirely within the stocks that are inside the portfolio. There are 80 stocks that are in here. So, the MidCap 400 holds 400 companies — not exactly 400 stocks, in case there’s some double counting and share classes. So, one-fifth of that universe, the 20% of that universe that has the highest relative strength and momentum on a six-month basis.

And when I looked at the portfolio, and folks can do this on their own, I saw an overweighting relative to the S&P MidCap Index. MDY is a good example to be able to use as a reference point. This was overweighted, this being XMMO, the Invesco fund, was overweighted towards industrials. It was roughly a third of the portfolio, and it was underexposed to financials, which for XMMO, is just about 10% of the overall portfolio.

So, you’re getting some exposure to a range of different sectors. The smallest sector that I see on here, I think there’s one company in the materials sector, but you’re getting some diversification, but you are concentrated in the sectors within the midcap index that are performing the best.

Chuck Jaffe: This strategy has been around for a long time. And if we look at Morningstar peer groups, this fund is at the top of its peer group for the last 10 years, in the last 15 years. I think when a lot of people see a factor-oriented fund, the factor here being momentum or relative strength, they think it’s maybe an adjunct to my base holding.

But if somebody wants to be a midcap investor, could this be all of it? Like, would you say, hey, why wouldn’t you make this all of your midcap and not over-diversify? Or would you say no, get the plain vanilla and then use the factor as a boost?

Todd Rosenbluth: So, I’ll go with both. Or it depends. For many people, midcap is certainly smaller in size of the portfolio than U.S. large-cap. So, I’ll ballpark here: maybe 10% of your overall exposure is to midcap companies. You could certainly have this be and serve as the core.

This is a risk-on approach to investing. Relative strength works until it doesn’t. And again, I’m far from qualified to be able to tell you and the audience who I think in many cases are big fans of relative strength. But things work until they don’t work and this six-month rebalance activity might be too long for some people.

So I think this can pair well with a midcap strategy, but it can, for many people, be a replacement for it. You mentioned the strong performance relative to the Morningstar category. I’m looking right now on screen at the index, I guess the ETF and the index as well, and how it performed in the last five years versus the S&P MidCap 400 index.

And so the ETF and the index behind it were up roughly 16% versus the S&P MidCap 400 index, that was up 13%. That’s as of the end of October, and of course on an annualized basis. So, this has worked as a replacement. Some people might want to have some exposure instead of all their midcap exposure to midcaps.

Chuck Jaffe: When you talk about a momentum strategy and it works until it doesn’t. The fact is that if the market has no momentum, a momentum strategy should still work. It should be putting you into the relative strongest stocks. And it’s interesting, when I looked at this fund, when you let me know that it was going to be the one we were doing, that like 10 years ago, this fund had a couple of years where it struggled.

But in the interim, even in market conditions when the market got ugly, like in 2022, this fund lost money, but it did better than most of its peers. So, can you make the case that relative strength, because it’s relative, should work all the time?

Todd Rosenbluth: So, I don’t think anything works all of the time, and I don’t want to have that level of confidence. Obviously, I’m highlighting this fund. I’m highlighting it for its strong recent performance. It’s actually been popular as well, which caught my eye. What I want to make sure people are aware of: This fund is overweighted towards certain sectors and underweight in towards other sectors. And as I look at what it is underweighted towards or has low exposure towards, I don’t know if it’s underrepresented.

I don’t know the midcap index well enough off the top of my head, but it is relatively low exposure to healthcare, relatively low exposure to real estate, energy, and materials. If any of those sectors were to lead the market between now and March, when the next rebalance happens, this fund will miss out on those gains. So, your case for this is that the winners continue to win on a relative basis.

In this case, industrials and technology combined are half the portfolio. If those stocks continue to lead the market higher for much of the remaining period before the rebalance, then XMMO is going to do exactly what you want it to do. If the market reverses and we see not just a pullback in those areas, but we see the market—midcap market—get led by some of these lower exposed sectors, this is a strategy that could, for that period of time, underperform until it rotates into those strong performing sectors.

Chuck Jaffe: I did not mean to suggest that it would wind up winning all the time. No fund does that. Just it’s that relative thing that, relatively speaking, it has done better than its peer group. And it’s a really interesting pick at this point.

It’s the XMMO, the Invesco S&P MidCap Momentum ETF, the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. We’ll see you again next week.

Todd Rosenbluth: See you soon, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yes, I’m Chuck Jaffe. I’d love it if you check out my hour-long weekday podcast by going to MoneyLifeShow.com, or you can search for it wherever you find your favorite podcast.

Now, if you’re searching for information on your favorite ETFs, or maybe the thing that might be your next favorite ETF, go to VettaFi.com and use the tools there to make yourself a better investor. They’re on X at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest, he’s on X too at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along or subscribing on your favorite podcast app. And we’ll be back with another ETF for you to consider next week. Until then, happy investing everybody!

Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.

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