XMMO: MidCap Momentum ETF, Rides On The Back Of Super Micro Computer (NYSEARCA:XMMO)

Introduction

Seeking Alpha Quant rates XMMO as a buy. XMMO has performed exceedingly well during this stock market rally. XMMO top holding is Super Micro Computer, SMCI (11.96%).

XMMO – Invesco S&P MidCap Momentum ETF

Fund Profile

Invesco Exchange-Traded Fund Trust – Invesco S&P MidCap Momentum ETF is an exchange-traded fund launched and managed by Invesco Capital Management LLC. It seeks to track the performance of the S&P MidCap 400 Momentum Index. Strictly in accordance with its guidelines and mandated procedures, the index provider compiles, maintains, and calculates the underlying index, which is composed of constituents of the S&P MidCap 400® Index that have the highest “momentum score.” The fund rebalances twice a year, in March and September.

Fund Details

Fund Type U.S. Equity

Issuer Invesco

Inception 03/03/2005

Expense Ratio 0.34%

AUM $1.57B

Top 10 Holdings

Super Micro Computer, Inc. 11.96%

Deckers Outdoor Corp. 4.80%

Reliance Steel & Aluminum Co. 3.62%

EMCOR Group, Inc. 3.10%

Penumbra, Inc. 2.62%

XPO, Inc. 2.48%

Lincoln Electric Holdings, Inc. 2.47%

Saia, Inc. 2.37%

Lennox International Inc. 2.31%

Toll Brothers, Inc. 2.13%

Total 37.86%

# of Holdings 75

*Holdings as of 2024-02-15

Investment Thesis

The current stock market environment is favorable for momentum strategies.

There are two events that contributed heavily in favor of momentum stocks. First, for more than a year now, the markets are obsessed with anything dealing in the area of artificial intelligence applications. Second, in October 2023, the Fed signaled that it is done raising the interest rates in this economic cycle. Now, the market believes that the Fed will start cutting interest rates in 2024, creating favorable conditions for a sustained market rally.

On the technical side, XMMO has been in a strong uptrend since October 27, 2023. It has been one of the strongest performers during the latest market rally. I will argue that XMMO benefited much from the rise of one stock, the Super Micro Computer, SMCI.

I think that the relative strength of XMMO versus S&P 500 will continue to increase for a long time.

Analysis

Currently, XMMO’s price is above its 50 and 200-days moving averages. Both the 50-day and the 200-day MAs are sloping upwards since November 2023.

MTUM has stronger momentum than the broad market ETF SPY. See the chart below. Returns from 10/27/2023 to 2/16/2024: MTUM (37.54%), SPY (22.12%)

The relative strength of XMMO vs SPY has declined for about two and a half years, until June 2023. Since then, the relative strength of MTUM started increasing and accelerated in 2024. It has not reached the level of late 2021, so it is likely to continue increasing.

While almost all stocks in the fund have made gains during the current rally, the top holding, SMCI, has made a disproportionate contribution. SMCI gained 232.78% and now it holds 11.96% of the fund. The chart below shows the gains of the top ten holdings. All ten made gains, some of them made big gains, but nothing compares with SMCI.

XMMO Long-Term Performance

XMMO tends to outperform during most market uptrends. But, it also underperforms during market sell-offs. These observations can be easily made in the chart below, which shows the total returns of SPY and XMMO since the fund’s inception.

Overall, in aggregate, XMMO leads the broad US market as represented by S&P 500. XMMO retuned 658% compared to 493% by SPY.

Market State

To determine the state of the market we compute the difference in total returns of the following four ETF pairs: (DBB, UUP), (XLI, XLU), (SLV, GLD) and (XLC, XLV) over an evaluation period. The evaluation period is variable. It is a function of market volatility.

Currently, the evaluation period is 80 trading days and all four pairs indicate risk-on.

The market state is supportive of a continuation of the rally. The prevailing market expectations are for the FED to stop raising interest rates and start cutting rates by the summer of 2024. Declining interest rates are very beneficial for the broad market and the small and mid-cap stocks, in particular.

Conclusion

I rate XMMO as a BUY for the following reasons:

1. The broad market is in risk-on mode.
2. XMMO has a strong momentum and is outperforming the broad market during the current rally.
3. Most top holdings of XMMO are highly profitable and are expected to continue to be so, over the long term.
4. Seeking Alpha Quant has a high BUY rating of XMMO (4.44/5).

Risks

The current market rally may stumble for many reasons. During any market selloff, the high momentum stocks are penalized more heavily than the broad market.

The holdings of XMMO have lofty valuations at this time. In fact, eight of the top ten holdings have a SA Quant “Valuation” of D to F. If the broad market enters a correction period, the XMMO holdings are likely to suffer heavy losses. In fact, SMCI suffered a 20% loss on Friday, February 16. That is not surprising after its tremendous rally.

The BUY rating of XMMO applies for as long as the broad market is in risk-on mode. Alternatively, we watch that XMMO price stays above the 50-day moving average.