Momentum ETFs: Two Vanguard Funds Crushing the S&P 500

Vanguard Momentum ETFs Leap Ahead of the S&P 500

Two exchange-traded funds from Vanguard—the Vanguard U.S. Momentum Factor ETF (VFMO) and the Vanguard Global ex-U.S. Momentum Factor ETF (VMOM)—have delivered returns that handily beat the S&P 500 over the past year. According to recent data, VFMO has gained roughly 30% while VMOM has advanced about 25%, compared to the S&P 500's approximate 20% return. These funds employ a rules-based approach that buys stocks with the strongest price momentum and sells those with weak momentum, rebalancing quarterly.

The outperformance comes as markets have exhibited clear directional trends, particularly in technology and growth sectors, which momentum strategies tend to overweight. VFMO's top holdings include names like Nvidia, Meta Platforms, and Eli Lilly—stocks that have led the broader rally. VMOM, which focuses on non-U.S. equities, has benefited from strong performance in Japanese and European markets, where momentum has been equally powerful.

Drivers Behind the Momentum Outperformance

Trending Markets Favor Systematic Strategies

Momentum investing thrives when markets move in sustained directions without sharp reversals. Over the past twelve months, both U.S. and international equities have experienced relatively low volatility and consistent upward trends, creating an ideal environment for these factor-based funds. The Vanguard ETFs capture this by continuously rotating into the strongest-performing stocks, effectively riding the winners.

Factor Exposure and Sector Concentration

Both VFMO and VMOM have significant exposure to technology and consumer cyclical sectors, which have led the rally. For instance, VFMO's sector allocation often tilts heavily toward tech, while VMOM holds a large weight in Japanese industrials and European luxury goods. This concentration amplifies returns in strong markets but also introduces specific risk if those sectors falter. Traders can use momentum indicators to gauge when these trends may be losing steam.

Key Levels and Assets to Watch

For traders monitoring momentum ETFs, the relative strength of the S&P 500 versus a 200-day moving average is a crucial gauge. If the index remains above this level, momentum strategies are likely to continue performing. Conversely, a break below could signal a regime change that could hurt these funds. Additionally, the performance of high-beta sectors like technology is worth watching, as any rotation out of growth stocks would likely impact VFMO and VMOM. The VIX index, currently subdued, is another indicator; a spike in volatility often triggers sharp reversals that can devastate momentum portfolios.

What This Means for Traders

Momentum ETFs offer a systematic way to participate in trending markets, but they are not without risks. The most significant risk is a sudden reversal—when the market turns, momentum strategies can suffer severe drawdowns because they are heavily invested in the stocks that have risen the most. Traders should consider using community insights to stay ahead of potential shifts. Another consideration is that these funds have higher turnover than passive index funds, which can lead to higher tax implications in taxable accounts. For those new to factor investing, understanding the mechanics of momentum is essential before committing capital. The VNIX classroom offers resources to help traders grasp these concepts.

It's also important to note that momentum can be a crowded trade. When too many investors pile into the same strategy, the edge can diminish, and exits can become disorderly. Diversification across different factor strategies—such as value or low volatility—can mitigate this risk. Finally, while past performance has been impressive, there is no guarantee that momentum will continue to outperform. Traders should monitor the market environment and be prepared to adjust their approach if conditions change.