Which S&P 500 stocks and ETFs are working out best this year? The ones with massive momentum.
Lifted by nonstop, red-hot stocks like Super Micro Computer, Nvidia and Vertiv Holdings, the iShares MSCI USA Momentum Factor ETF is up 7.5% this year, based on data from Morningstar Direct, S&P Global Market Intelligence and MarketSmith. That makes it the top-performing actively traded U.S. diversified ETF this year. Six of the momentum ETF's positions are already up 14% or more this year.
Going with the momentum strategy is working big-time. The ETF, which doubles down on stocks that are rising the most, blows away the 10.5% drop of Cathie Wood's ARK Innovation fund. ARK Innovation is now the fourth-worst performing diversified ETF this year. Ironically, ARK Innovation was last year's top ETF.
"Letting your winners run is a well proven strategy that works until of course the relative strength shows signs of weakness," said Todd Rosenbluth, head of research at Vetta Fi. "In January, many of 2023's best performers climbed even higher."
Momentum Is Working
Investors are finding out the best way to make money is to stick with stocks that are working. And strength fuels more strength for the S&P 500.
"History shows new highs bode well for future returns," said John Lynch, chief investment officer for Comerica Wealth Management. "While it is natural for investors to question whether the market has advanced too rapidly, historical data suggests otherwise."
Data highlights the power of momentum. Going back to 1972, the S&P 500 notched 37 new highs and soared more than 12% in the one year following an all-time high, Lynch found.
In other words, in a rising market the trend is your friend. And ETFs can help you capture this momentum.
Looking At S&P 500 Momentum
iShares MSCI USA Momentum Factor is all-in with the top S&P 500 stocks. And when the strategy works, it really works.
The $9.2 billion-in-assets ETF holds more than 125 positions focused on the stocks that are outperforming the S&P 500. And that means it's "heavily weighted toward information technology and communications services," Rosenbluth says. Big holdings in those sectors include companies like Advanced Micro Devices and Broadcom plus giants like Microsoft and Meta Platforms. Just those four top stocks account for nearly 20% of the ETF's portfolio.
Another big position, at 5.6% of the portfolio, is Nvidia. And that stock is up 24% just this year. But don't leave out skyrocketing Super Micro Computer. It's only a 0.5% weight in the ETF's portfolio, but it's up more than 85% this year.
Meanwhile, the ETF is changing along with the S&P 500's leadership. iShares MSCI USA Momentum updates its portfolio every six months to own stocks currently with the mojo. The next rebalance comes in May. "As long as these growth stocks stay in favor, the strategy will shine," Rosenbluth said. "However, if more value-oriented energy and financials lead the charge soon MTUM will largely miss out."
Not Just Big Caps
Interestingly, though, the momentum strategy is also working with midsize stocks. And at least one ETF is capturing the gains.
Invesco S&P MidCap Momentum ETF is up 5.13% this year. That's outperforming even some large-cap growth strategies. The ETF owns "less established midcap companies" like Deckers Outdoor and Lincoln Electric, Rosenbluth said. "While the tech sector has shown strength recently for large caps, XMMO has more exposure to industrials and consumer discretionary."
Just know that "momentum" means different things to different investors. "Many people think of the S&P 500 index ETFs as momentum focused due to the market cap nature," Rosenbluth said. "Momentum investing is measured in intermediate-term periods like six-to-12 months."
Top Momentum Stocks
Best performers this year in iShares MSCI USA Momentum Factor ETF
| Company | Ticker | 2023 stock % ch. | YTD % ch. |
|---|---|---|---|
| Super Micro Computer | 246.2% | 86.3% | |
| Nvidia | 238.9 | 24.2 | |
| Vertiv Holdings | 251.6 | 17.3 | |
| Netflix | 65.1 | 15.9 | |
| Palo Alto Networks | 111.3 | 14.8 | |
| CrowdStrike Holdings | 142.5 | 14.6 |
