The Small Cap ETF With $2.2 Billion in Assets That Keeps Beating All Benchmarks Needs To Be Studied

Small-cap momentum strategies offer targeted exposure to smaller companies with strong recent performance, but the question is whether that tilt justifies added volatility. Invesco S&P SmallCap Momentum ETF (NYSEARCA:XSMO) applies a momentum screen to the S&P SmallCap 600 universe, concentrating holdings in approximately 120 stocks showing the strongest price and earnings trends. The decision hinges on whether momentum factor outperformance justifies higher sector concentration and amplified swings.

The ETF’s Intended Portfolio Role

XSMO serves as a tactical small-cap growth allocation for investors who believe recent winners will continue outperforming. The fund tracks the S&P SmallCap 600 Momentum Index, selecting stocks based on price momentum over six and twelve months combined with fundamental momentum signals. This produces a portfolio heavily weighted toward Industrials (29.2%), Financials (16%), and Consumer Discretionary (15.6%)—sectors that tend to lead during economic expansion.

The return engine depends on momentum persistence: stocks with strong recent performance continuing to outpace peers. This differs fundamentally from value or quality strategies. At 0.36% annually, the fund sits in a reasonable cost range for a factor-based strategy. Its $2.2 billion in assets signals sufficient institutional adoption to support liquidity, while the relatively modest single-stock concentration—no position exceeds 3.74%—means the momentum tilt is expressed broadly rather than through a handful of concentrated bets.

Does It Deliver?

Over the past year, XSMO returned 17.06%, edging out both iShares Russell 2000 ETF (NYSEARCA:IWM) (16.19%) and its closest apples-to-apples peer SPDR Portfolio S&P 600 Small Cap ETF (NYSEARCA:SPSM) (13.02%)—demonstrating that the momentum screen is adding value even within the same small-cap universe.

The longer-term picture reinforces this: over five years, XSMO’s 52.65% gain represents a meaningful premium over SPSM’s 34.46%, suggesting momentum persistence has rewarded patient holders willing to accept higher concentration risk.

Institutional interest has followed, with multiple wealth managers expanding positions as the fund reached new 12-month highs—suggesting growing conviction that small-cap momentum leadership has further room to run.

The Tradeoffs

Momentum strategies amplify volatility in both directions—reversals can be swift and severe. XSMO’s near-30% Industrials weighting creates meaningful sector concentration risk versus broader small-cap indexes. The 0.49% dividend yield makes this unsuitable for income-focused portfolios, and momentum factor performance is cyclical; extended underperformance is possible when market leadership shifts.

XSMO carries a concentrated momentum tilt with a 0.49% dividend yield and near-30% Industrials weighting. These characteristics reflect the fund’s design as a momentum-factor vehicle rather than a broad small-cap or income-oriented strategy.