By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel generally agrees that while VFMO and VFMF have outperformed the S&P 500 in recent years, their momentum-based strategies carry significant risks such as momentum crashes, whipsaw-prone reversals, and potential tax drag. The funds' smaller size and higher expense ratios suggest they may be better suited as satellite positions rather than core replacements for broad-market exposure.
Risk: Momentum crashes and reversals
Opportunity: Potential outperformance in specific market regimes
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Momentum investing -- the general idea that you should let your winners run -- is a popular strategy on Wall Street. In fact, multiple studies, including the well-known Eugene Fama and Kenneth French study, have found that there is the potential to capture higher returns by following a momentum strategy.
Vanguard is much more well-known for its lineup of broad, ultra-low-fee index funds, but it does actually have a pair of ETFs that incorporate the momentum factor into their strategies. They fly under the radar because they don't necessarily fit the Vanguard stereotype. But they've been around for more than eight years, and they have a solid track record of beating the S&P 500.
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A good momentum strategy follows a well-documented rules-based structure. A lot of the results will depend on the time frames used as part of its lookback period. Most will use somewhere between three and 12 months. Some will use multiple lookback points (such as three months and six months). Either strategy can work, but it generally shouldn't look at periods longer than 12 months.
A scored weighting approach, or one that gives higher weightings to those stocks demonstrating stronger momentum, also tends to work better. Market cap-weighted approaches emphasize company size over the momentum factor, which usually diminishes effectiveness. The two Vanguard ETFs meet both of these criteria.
The Vanguard U.S. Momentum Factor ETF (NYSEMKT: VFMO) is a pure momentum-based stock picking strategy. It starts with a universe of U.S. stocks of all sizes and looks at returns over the prior six-month and 11-month measurement periods.
Stocks with greater momentum scores receive higher weightings in the portfolio. But given that there are more than 700 stocks in the ETF, diversification is high and concentration across any sector or market capitalization is low.
The Vanguard U.S. Multifactor ETF (NYSEMKT: VFMF) defines momentum in the same way that the Momentum ETF does, but it's just one of four factors that are considered together: momentum, quality, value, and low volatility.
This ETF is similarly diversified, and components are weighted using a composite factor score. Because it considers some more traditionally defensive metrics in its selection process, it tends to have lower volatility than a pure momentum strategy.
| Metric | VOO | VFMO | VFMF | |---|---|---|---| | Expense ratio | 0.03% | 0.13% | 0.18% | | Assets under management (AUM) | $990.6 billion | $1.9 billion | $0.7 billion | | Year-to-date total return | 9.9% | 22.6% | 17.9% | | 5-year total return | 84.1% | 90.8% | 94.4% | | Top sectors | Tech (39%), financials (11%), communication services (10%) | Tech (22%), industrials (20%), healthcare (19%) | Financials (23%), consumer discretionary (17%), healthcare (14%) | | Top holdings | Nvidia(7.9%),Apple(7.1%),Alphabet(6.1%) | Advanced Micro Devices(1%),Micron Technology(1%),Applied Materials(1%) | Micron Technology (1%), Newmont(0.9%),Travelers(0.9%) |
The most obvious takeaway here is that these two momentum-based ETFs look nothing like the Vanguard S&P 500 ETF. The S&P 500 is much more heavily concentrated in a handful of mega-cap tech companies. The tech sector itself accounts for nearly 40% of the portfolio, one of the highest sector concentrations the index has ever seen.
The other two ETFs have no such individual component concentration issues. Even at the sector level, investments are spread out much more uniformly among a combination of growth, defensive, and cyclical sectors. This is one of the earmarks of a solid momentum strategy. It focuses on individual stock momentum, regardless of where it's coming from. Plus, more than half of each ETF is invested in mid- and small-cap stocks, providing true diversification benefits when paired with an S&P 500 fund.
The historical returns, however, tell the story. Both Vanguard ETFs have outperformed the S&P 500 year to date and over the past one-, three-, and five-year periods. The fact that they've done this without the tech or large-cap concentration is even more impressive. Vanguard's factor ETF lineup doesn't get the credit it deserves, but its momentum factor strategy has definitely demonstrated its worth over time.
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David Dierking has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Applied Materials, Micron Technology, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"These ETFs are tactical factor-tilted instruments that carry significant 'regime risk' rather than being reliable long-term substitutes for broad-market index funds."
The article frames VFMO and VFMF as superior alternatives to the S&P 500 by highlighting their lack of mega-cap tech concentration. While their recent outperformance is clear, investors must recognize that 'momentum' is a double-edged sword. Momentum strategies often suffer from 'momentum crashes'—sudden, violent reversals when market leadership shifts abruptly. By avoiding the concentrated tech leaders that have driven the S&P 500's gains, these ETFs are essentially making a tactical bet that the current market regime of AI-driven growth is nearing a ceiling. Their lower AUM and higher expense ratios compared to VOO suggest these are tools for factor-tilted satellite positions, not core replacements for broad-market exposure.
If the current tech-led market rally has legs due to structural AI productivity gains, these factor funds will continue to underperform the S&P 500 by missing the primary engine of index growth.
"N/A"
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"Recent outperformance reflects a favorable regime for momentum and small-cap cyclicals, not a durable structural advantage—and the strategy's vulnerability to mean reversion and style rotation is underplayed."
The article conflates two separate phenomena: factor outperformance and market timing luck. VFMO and VFMF beat VOO over five years partly because momentum *worked* in a low-rate, mega-cap-dominated regime—not because the strategy is inherently superior. Year-to-date returns (22.6% vs 9.9%) are inflated by a narrow window where small/mid-cap cyclicals and industrials rallied hard. The $1.9B and $0.7B AUM are tiny; if capital floods in, alpha evaporates. Expense ratios of 0.13–0.18% matter less when outperformance is 5–10%, but they're real drags if momentum mean-reverts. The article also ignores that momentum strategies are notoriously whipsaw-prone in reversals and offer no protection in drawdowns.
If the Fed stays restrictive and small-cap cyclicals continue outperforming, these ETFs could sustain their edge for years—and the low concentration risk versus the Magnificent 7 is genuinely valuable insurance.
"Past outperformance of momentum/multifactor ETFs is not durable alpha; regime changes, higher fees, and liquidity risks can erode future returns."
The piece highlights VFMO and VFMF beating the S&P 500 over five years, but it glosses over typical momentum risks. With only about $1.9B (VFMO) and $0.7B (VFMF) in AUM, liquidity and tracking error can bite in volatile markets, especially versus a diversified $990B S&P 500 ETF. Fees at 0.13% and 0.18% are higher than plain-vanilla broad-market funds, which gnaws at net returns, particularly in choppy markets. There’s also a mid/small-cap tilt and tech exposure that can magnify drawdowns in risk-off periods. The claim of ‘no tech or large-cap concentration’ is overstated given sector/stock weightings and typical momentum biases.
The strongest counterpoint is that momentum has a history of reverting after tech-driven rallies; if regime factors shift (higher rates, growth deceleration), these ETFs could underperform the S&P for extended periods, amplified by their smaller size and potential liquidity gaps.
"The hidden cost of high turnover in momentum ETFs is tax inefficiency, which likely negates the reported alpha for taxable investors."
Claude is right about the 'momentum trap,' but everyone is ignoring the tax drag. Because VFMO and VFMF rely on active turnover to capture momentum, they aren't just paying 13-18 bps in expense ratios; they are likely generating significant short-term capital gains distributions. In taxable accounts, that friction often erodes the very alpha these funds claim to capture. Investors aren't just betting on factor performance; they are betting that the strategy's gross alpha exceeds the substantial tax leakage.
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"AUM size alone doesn't invalidate these funds; the real risk is regime persistence favoring concentrated mega-cap tech over broad momentum."
Gemini's tax drag point is sharp, but it needs specificity. VFMO/VFMF turnover rates aren't disclosed in the article—we're speculating. More pressing: Claude and ChatGPT both cite $1.9B/$0.7B AUM as 'tiny,' but that's misleading. These are niche factor funds, not new launches. The real question is whether momentum *itself* has structural headwinds now that mega-cap tech dominance is entrenched. If AI capex cycles persist, these funds stay structurally disadvantaged regardless of tax efficiency.
"Tax drag is speculative without disclosed turnover data, and the real edge depends on regime timing rather than just expenses."
Gemini, tax drag is real but we don’t know turnover or distribution schedules to size it. You’re speculating on drag without data. Even if material, the bigger risk remains regime dependence: momentum works in narrow rate scenarios; a shift to higher rates or broad AI capex cycles could wipe out post-tax alpha. Until we see disclosed turnover and after-tax returns, label this edge as uncertain rather than a durable alpha.
The panel generally agrees that while VFMO and VFMF have outperformed the S&P 500 in recent years, their momentum-based strategies carry significant risks such as momentum crashes, whipsaw-prone reversals, and potential tax drag. The funds' smaller size and higher expense ratios suggest they may be better suited as satellite positions rather than core replacements for broad-market exposure.
Potential outperformance in specific market regimes
Momentum crashes and reversals