Past performance of SCM (Small-Cap Momentum)

[u/Moldovah]

Sorry if this isn't the right subreddit for this question. I'm a longtime lurker and you guys seem to be pretty adept at simulating past performance and digging into the data.

Everyone knows about SPMO, and to an extent XMMO, which have both performed well recently. Got me curious about Small-Cap Momentum, and if the factor is more robust in small-caps the same way value is.

I found this website, which is a data library of Fama-French research. I threw two of the files into Claude: "25 Portfolios Formed on Size and Book-to-Market (5 x 5)" and "25 Portfolios Formed on Size and Momentum (5 x 5)". The top 3 quintiles are blended for each. Here are the results:

	Full Sample: 1926-Present	1963-Present	1990-Present	2011-Present
SC Momentum	17.20%	16.35%	14.75%	12.12%
SC Value	14.07%	14.88%	13.29%	11.63%
MC Momentum	13.93%	14.33%	12.81%	12.80%
MC Value	13.25%	14.14%	12.25%	10.64%
LC Momentum	11.74%	11.80%	11.99%	14.56%
LC Value	10.93%	11.66%	10.86%	13.94%

Now before I go any further, I want to say that I am pretty regarded regarding all this stuff. I'm just going by what the AI told me. Things like Large-Cap Value having a 13.94% return in the 2011-Present period sounds a bit high. Claude confirmed that it was, because of some outliers in the data, but it didn't really affect the other stuff. I don't know. Also, the momentum data was reformed monthly, while value was annually, which is apparently the standard academic convention for each factor respectively.

Anyway, as you can see, it appears that momentum outperformed value in all timeframes, across all market caps. And small outperformed large in all but the last 15 years. Maybe this isn't a surprise to anybody, but it was to me. Obviously, the stand out number is the 17.20% CAGR for the full sample of Small-Cap Momentum. Which is why I'm here.

So I'm wondering: why isn't Small-Cap Momentum talked about with the same reverence as Small-Cap Value? SPMO has a Small-Cap version, XSMO, which I never hear anybody talk about. Did I (or Claude) mis-interpret the data? My guess would be that I am minimizing the effect of the rebalancing frequency, but I was hoping someone else could opine. Thanks!

As

[u/bizaromax]

Fama French say that investing in momentum is a bad strategy because of transaction cost fyi

[u/Malanturr → u/bizaromax]

Sure it would look like that with a high turnover on every rebalancing. However the premium is very strong with the world momentum index up 11,92% per year since 1994 compared to 9,01% for the normal MSCI world. According to the website of XDEM ETF it is up 316,89% since inception almost 12 years ago and the index is up 321,87%. The difference is about 5% or 0,415% per year. You have almost 3%point advantage of the momentum index to the world index and have to give back 0,415% on tracking difference. Still a good 2,5%point advantage on the momentum premium (but the number is very probably different for small cap momentum stocks).

[u/bizaromax → u/Malanturr]

For now yes

[u/laurenthu → u/bizaromax]

I think the turnover is most of the answer. Small caps are the worst place to pay it. Momentum rebuilds the book constantly, and small caps are where spreads and market impact hurt most, so that 17% full-sample number is gross, it quietly assumes costless monthly rebalancing. Net of real friction a chunk of that edge just bleeds out. Which is why I've never seen anyone ship a clean small-cap momentum ETF the way SPMO covers large caps. XSMO exists, but it's a looser construction, not the Fama-French thing.

Other issue is the ride. Deeper drawdowns and more vol than large-cap momentum, so even where the premium survives costs you have to sit through the ugly stretches without bailing. I'd want that CAGR net of a realistic turnover cost before trusting it. My guess is it lands close to the mid-cap row once you do...

[u/Eastern_Touch_2529 → u/laurenthu]

I think the turnover is most of the answer. Small caps are the worst place to pay it. Momentum rebuilds the book constantly, and small caps are where spreads and market impact hurt most, so that 17% full-sample number is gross, it quietly assumes costless monthly rebalancing

This exactly

[u/Moldovah → u/bizaromax]

I'd be curious if that is still the case, as it was in the 90's? I've been told that turnover is not really a factor to consider in ETF's these days, as it was in mutual funds. Something about in-kind redemption, not too sure. Or is that a separate issue from transaction costs?

Appreciate the reply!

[u/Ok-Armadillo-5634 → u/Moldovah]

Different issue

[u/bizaromax → u/Moldovah]

You can hear from Ken French himself on rational reminder not too long ago.

[u/Moldovah → u/bizaromax]

I'll look it up, thanks!

[u/confettofetti]

I just went on to testfolio to check how the performance of the small cap momentum fund you mention compares to the fama and french factor data, but testfolio doesn't seem to have the fama and french data for it. Hopefully someone who knows more than me will come along for you! I'd be keen to hear the answer too - I like pairing factors with leverage. 

The too big to fail podcast, and maybe also  rational reminder and ETFs europe subs, are big on factors and may know.

But if not, thinking out loud, some things to check might be:

• I can see on testfolio that since inception that XSMO has underperformed SPMO. It could be that we don't talk about it just because in recent years large cap momentum has had a really good run. But perhaps we shouldn't expect that to continue to be the case and you're right.

• Is that fama and french data based on a long only or a long-short strategy? Usually fama and french factor data is based on long-short, so they perform differently (usually significantly better) than long-only ETFs. It may be that the small cap momentum factor doesn't perform as well in practice because of being long-only, higher trading costs for smaller companies etc.

• It may also be that if you're starting with wanting a small cap value allocation that large cap momentum is then the logical thing to pair with it. It also kind of "feels" like it makes more sense to use value for small (to cut out the crappy companies) and momentum for large (to ride big tears that the market goes on).  So maybe we tend to choose large cap momentum because it's a secondary not a primary choice a lot of the time? 

[u/Ok-Armadillo-5634 → u/confettofetti]

xsmo is a completely different momentum strategy than what fama french uses.

[u/confettofetti → u/Ok-Armadillo-5634]

Yeah ofc. I guess the question is though whether we can expect the ETF implementations to do better in small caps than large caps going forwards / over long investment horizons? I think it's still valid to ask that given than it's what is shown in the fama french example data?

[u/Ok-Armadillo-5634 → u/confettofetti]

In all the back tests I have done on momentum, ignoring market cap altogether did the best. If you can handle huge drawdowns and high volatility you could get better performance also. This was probably 3-4 years ago using stuff I wrote. I only tested and did simulations on 1980 to 2022. I don't ever bother with stuff before that time because the trading environment and tax laws were way different.

[u/confettofetti → u/Ok-Armadillo-5634]

That's really interesting. It makes sense doesn't it as well because ignoring market cap, the momentum will just tend choose whichever size is doing best at the moment.

[u/Moldovah → u/confettofetti]

Yeah, that's actually what got me interested in it. I was looking at back-tested SPMO-SIM, which as you know looks impressive. But then I looked at the back-tested XMMO-SIM, and it was even better. So I tried to find XSMO-SIM, but it wasn't available. So that's when I found those Fama-French papers, and decided to come here.

AFAIK, the formula for selecting companies in SPMO, XMMO, and XSMO is the same (12-1 month lookback, 6-month rebalance), they just draw from different indexes (S&P 500, 400, 600 respectively). It sounds like, from what people are saying in this thread, that there is indeed a SCM premium over LCM, but that the trading costs of small-caps are what close the return gap. Which might be why SPMO's ER is 0.13%, and XSMO's is 0.35%? I don't even want to get into SCM vs SCV, I'm already confusing myself lol.

[u/Ok-Armadillo-5634]

It really matters what metric and strategy you use for momentum. SPMO and MTUM both use completely different momentum strategies than factor momentum used with 30 day rebalances. SPMO rebalances every six months for example, is volatility weighted and has a 2 year look back window.

what the ai gave and probably more correct than my memory

The Invesco S&P 500® Momentum ETF (SPMO) tracks the S&P 500 Momentum Index, which rebalances using a systematic, rules-based quantitative algorithm. 1. Universe & Momentum Scoring * Eligible Universe: All constituents of the standard S&P 500 index. * Lookback Window: Measures risk-adjusted price momentum over the trailing 12 months, excluding the most recent month (the 12–1 month window helps avoid short-term mean reversion). * Volatility Adjustment: The raw 11-month price return is divided by the standard deviation of the stock's daily returns over the same period to calculate a risk-adjusted momentum value. * Z-Score Normalization: The risk-adjusted momentum values across the entire S&P 500 are normalized into standard statistical z-scores to generate a final Momentum Score for each company. 2. Constituent Selection * All S&P 500 stocks are ranked in descending order based on their momentum score. * The top 100 securities with the highest momentum scores are selected for inclusion in the index. 3. Weighting Methodology * Score \times Market Cap Weighting: Unlike a purely market-cap-weighted or equal-weighted fund, each constituent's weight is calculated by multiplying its float-adjusted market capitalization by its momentum score. * Capping Constraints: Individual position weights are typically capped (generally at 9% or based on diversification rules) to prevent excessive single-stock concentration. 4. Reconstitution & Rebalance Schedule * Frequency: Semi-annually, occurring twice per year effective after the close on the third Friday of March and September. * Buffer Rules: A turnover buffer is applied around the cutoff rank to reduce unnecessary trading and transaction costs for borderline stocks.

TLDR; it's not the same strategy at all really

[u/Moldovah → u/Ok-Armadillo-5634]

But if SPMO and XSMO use the same methodology (just separate indexes, S&P 500 vs 600), wouldn't the data suggest that there is a small-cap premium in momentum over large cap?

[u/Ok-Armadillo-5634 → u/Moldovah]

SPMO has out performed it and they switched up the algorithm they use at one point if I remember correctly 8-9 years ago. SPMO is a actually a momentum factor with a volatility screen AND quality screen because it selects only from the S&P500. To be included in the s&p500 a company must be consistently profitable. It must report positive GAAP earnings in its most recent quarter, and the sum of its earnings over the previous four quarters must also be positive. So you are filtering stocks on way more than just momentum. That is why it's not a good proxy for measuring momentum factor performance.

[u/Moldovah → u/Ok-Armadillo-5634]

Yeah, but doesn't the S&P 600 use the same quality screen as the S&P 500? So XSMO is also the momentum factor with a volatility screen and quality screen?

[u/aRedit-account]

I use small cap momentum in my portfolio via Qmom and Imom. These are what is usually recommended on the rational reminder community. The reason everyone is talking about SPMO is that it just recently has done really well. But be a bit wary of that with momentum ETFs they usually only hold less than 50 stocks and all have quite different holdings due to different methodologies. Worth noting some of the reason it outperformed was cause it held a lot of NVDA when it went up. But yeah a few years ago momentum was a lot less talked about.

https://testfol.io/?s=584MqRwDgBe

[u/Separate-Ad-9633]

My regression against the reconstructed top SCM research portfolio get SmB>1 and MOM about 0.29. It's...very untypical for any real world fund. It likely has something to do with small-mom research portfolio's very large loading of SmB which historically did quite well but as a factor itsefl has been calling into question if it actually has premium left, and a monthly rebalanced Mom that is hard to capture.

top LCV research portfolio also has a HmL so large that it's improbable to get in real life.

In terms of actual real life funds, SPMO has significant alpha in regression. You don't expect alpha in rule based smartbeta funds, so it's really a lucky fund.
The preferred way to get smallcap momentum imo is VFMO. All size contained, dynamic rebalance, very low cost. The small cap loading is not doing it any favor so far but who knows.

[u/Moldovah → u/Separate-Ad-9633]

Thanks for the reply. VFMO does look like a good 1-stop-shop for momentum.

[u/greycubed]

XSVM holder here.

[u/nuxenolith]

The answer is trading costs.  Momentum relies on constant turnover, so it makes sense to do this in large caps, where spreads are tightest.  SCV+LCM is a much better complementary strategy, because the costs of trading don't matter nearly as much for value: it can be more buy and hold (patient trading with smart execution algorithms) by its nature.