Following its victory over the S&P 500 in 2024, this Vanguard Growth ETF has surged beyond 6% in 2025.
The Vanguard U.S. Momentum Factor ETF (VFMO) managed to narrowly surpass the S&P 500 in the turbulent year of 2024. However, it's the ETF's impressive 6.3% year-to-date return as of January 26 that truly garnered attention, outperforming the S&P 500's modest 3.7% growth.
This ETF is widely regarded as one of the more distinctive options in the ETF universe due to its unique strategies and performance patterns. Let's delve into why VFMO could persistently outperform the S&P 500, and why investors should approach this fund with caution.
Diving into Quantitative Funds
The VFMO employs a quantitative, rules-based model to invest in stocks exhibiting strong recent performance, thereby earning the moniker "momentum." This strategy has proven successful in periods when hot stocks continue to flourish. The fund's primary allure is its high diversification, holding 693 stocks, none of which accounts for more than 1% of the fund. Compared to the top-heavy nature of the S&P 500, which boasts the top 10 companies constituting a substantial 38.6% of the fund, VFMO displays a starkly contrasting structure.
What makes this ETF stand out is its non-market-cap weighting. While the S&P 500's most valuable companies hold significant influence due to their market capitalization, VFMO's weighting system features a more even distribution of small-cap, mid-cap, and large-cap companies. Although the majority of VFMO's top holdings belong to large caps, the distribution is more balanced than that of the S&P 500.
By way of illustration, Nvidia -- a prominent company in the S&P 500 -- holds a 6.6% spot in the Vanguard S&P 500 ETF (VOO). While still a prominent figure in the VFMO, Nvidia accounts for just 0.8% of the fund due to its diversified nature.
Momentum Galore or Cautionary Tale?
Given the tech sector's recent surge in value, spearheaded by tech giants such as Apple, Nvidia, Microsoft, and Broadcom, it constitutes a staggering 32.5% of the Vanguard S&P 500 ETF. The tech sector undeniably boasts momentum, making it a crucial component in the VFMO. However, while tech dominates the S&P 500, its influence is not as overpowering in VFMO. In fact, as of this writing, financials tanked the top spot in VFMO at 22.6%, edging out industrials (19.99%) and consumer discretionary (15%).
Scrutiny of the Momentum ETF's holdings reveals intriguing findings. For instance, while the energy sector underperformed the S&P 500 significantly in 2024, midstream pipeline and infrastructure stocks witnessed substantial growth. Consequently, giants like Williams Companies and Oneok, which are typically regarded as income stocks, became significant components in the ETF.
Another noteworthy example is AT&T, a high-yield stodgy company that experienced a remarkable 18.4% boost in the last six months. Unsurprisingly, it now ranks as a top 20 holding in the Momentum ETF. Similarly, rising Dividend King Walmart recorded a phenomenal 71.9% jump in 2024, further bolstering its presence in the Momentum ETF.
The primary takeaway is that VFMO's ever-changing roster of holdings depends substantially on recent performance. If tech stocks falter, the U.S. Momentum Factor ETF will shift its attention to alternative sectors, while the S&P 500's focus on tech may limit its adaptability to market fluctuations.
Tackling the Momentum ETF
Due to its distinctive investment strategy, the Momentum ETF challenges the conventional wisdom of long-term investing, which advocates for identifying and holding companies with growth potential through periods of volatility. In contrast, VFMO simply trades stocks as they rise in popularity, valuations and fundamentals are not considered.
When seeking ETFs to purchase, prioritize companies or themes that resonate with your investment goals. If you aspire to diversify your portfolio with an investment in the broader market while favoring value stocks, evaluate the merits of the Vanguard Value ETF. If growth stocks appeal to you more, the Vanguard Growth ETF may be a worthwhile consideration.
In general, most investors may find better opportunities in more straightforward low-cost Vanguard ETFs, which feature top holdings that align with their investment objectives.
The U.S. Momentum Factor ETF emerges as a tool rather than a portfolio staple for several reasons:
- Momentum-driven Investing: The fund's focus on buying popular stocks ignores valuations and fundamentals, which can be risky in bear markets. This approach may be advantageous for value-focused or risk-averse investors seeking a hedge for a burgeoning market.
- Surprising Resilience: In unexpected market downturns, such as 2022, the VFMO ETF fared better than the S&P 500 and Nasdaq Composite, demonstrating potential utility as a market hedge by divesting from falling stocks and investing in rising ones based on its quantitative model.
Despite its captivating returns in the past decade, with a 141.5% total return, the VFMO should not be considered a cornerstone of any portfolio. Its inconsistent performance in comparison to other momentum-focused ETFs and the S&P 500 discourages building a portfolio around the fund. Some investors may wish to steer clear of VFMO entirely and focus on more traditional investment vehicles for long-term wealth accrual.
In terms of finance and investing, the Vanguard U.S. Momentum Factor ETF (VFMO) attracts attention due to its unique quantitative strategy that invests in stocks exhibiting strong recent performance. This strategy, which brings high diversification, allows VFMO to outperform the top-heavy S&P 500, as demonstrated by its impressive year-to-date return.
Furthermore, the VFMO's non-market-cap weighting system, which distributes small-cap, mid-cap, and large-cap companies more evenly, sets it apart from the S&P 500. This balance can potentially allow VFMO to adapt better to market fluctuations compared to the S&P 500, which relies heavily on the tech sector.
