Momentum strategies, which tend to thrive in trending markets, have recently delivered strong performance due to continued economic strength and positive market sentiment. In the past 12 months, the S&P 500^® Momentum Index posted notable outperformance compared with some other S&P 500 factors, as well as the S&P 500 itself (see Exhibit 1).

(Click on image to enlarge)

In this blog, we will review the methodology, performance characteristics and attribution for the S&P Momentum Indices, with particular focus on the S&P 500 Momentum Index, S&P MidCap 400^® Momentum Index and S&P SmallCap 600^® Momentum Index.

Index Methodology

The S&P Momentum Indices generally use 12-month risk-adjusted price momentum to select stocks ranked in the top quintile (see Exhibit 2).¹ We skip the most recent month when calculating price momentum to account for short-term reversal effects.² The use of risk-adjusted momentum, instead of raw price momentum, can help to mitigate the negative effects of idiosyncratic risk associated with raw momentum and reduce downside risks.³

(Click on image to enlarge)

The constituents of the momentum indices are weighted by the product of their FMC and momentum score, subject to individual security and sector weight constraints. Such a weighting scheme strikes a balance between market exposure and target factor exposure. The indices are rebalanced semiannually, with a 20% buffer rule applied to reduce turnover.

A Short- and Long-Term View of Performance

Exhibit 3 illustrates that all three S&P Momentum Indices have historically outperformed their corresponding benchmarks based on absolute returns, both in the short and long term.

Over the past year, the S&P 500 Momentum Index, S&P MidCap 400 Momentum Index and S&P SmallCap 600 Momentum Index outperformed their benchmarks by 33.35%, 30.92%% and 16.49%, respectively.

Furthermore, these indices have demonstrated favorable capture ratios, delivering higher or similar returns during up markets ⁴ and experiencing smaller

declines during down markets.

(Click on image to enlarge)

Top Performance Contributors

Exhibit 4 shows the top five contributors to the performance of these three S&P Momentum Indices over the one-year period ending June 30, 2024. Nvidia, Super Micro Computer and Abercrombie & Fitch were the top performers in the S&P 500 Momentum Index, S&P MidCap 400^® Momentum Index and S&P SmallCap 600^® Momentum Index, respectively.

Sector Exposure

Exhibit 5 shows the active sector weights for the S&P Momentum Indices. Over the full period, these indices have demonstrated minimal sector bets over time. Over the long term, compared to their respective benchmarks, the indices have had small overweights in the Information Technology, Health Care and Consumer Discretionary sectors, while also having modest underweights in the Financials and Materials sectors.

As of June 30, 2024, the S&P 500 Momentum Index had an active overweight of 18.40% in the Information Technology sector, while the S&P MidCap 400 Momentum Index and S&P SmallCap 600 Momentum Index had overweight positions of 15.89% and 14.77%, respectively, in the Industrials sector. Conversely, all three momentum indices had significant underweights in Financials.

(Click on image to enlarge)

Factor Exposure

Exhibit 6 provides insights into the factor exposure differences between S&P Momentum Indices and their respective benchmarks, utilizing Axioma Risk Model Factor Z-scores. As expected, the S&P Momentum Indices displayed significantly higher exposures to the momentum factor compared to their benchmarks. Furthermore, these indices exhibited higher quality, as evidenced by their higher profitability exposure and lower exposure to the leverage ratio. Lastly, the indices exhibited higher exposure to the growth factor and lower exposure to the value factor.

(Click on image to enlarge)

More By This Author: