XSVM's small-cap lead runs on momentum

Entering Sept. 4, the S&P SmallCap 600 and its value counterpart were running neck and neck at nearly 21% each year to date, according to ETF Trends. The near-tie makes the $646.5 million Invesco S&P SmallCap Value with Momentum ETF's 200-plus basis point lead over both benchmarks the more telling number.

A fund's factor label and its construction can sit in different places. XSVM, which turned 21 in March, tracks the S&P 600 High Momentum Value Index, whose methodology assigns each stock a momentum score and a value score; momentum decides which names qualify for inclusion, while value then determines their weights, with the highest value scores earning the largest stakes. Whatever the prospectus language suggests, that is momentum first and value second.

That momentum-first setup suits the moment. ETF Trends notes some experts read the simultaneous rally in small-cap value and mega-cap growth as an anomaly, attributing part of the renewed enthusiasm for the factor to the AI trade, and Morningstar's Russ Kinnel calls many small-value portfolios HALO plays — heavy assets, low obsolescence — naming energy producers and large machines as businesses that do not look like chum for AI. XSVM carries some of that trait, with energy, industrial and materials stocks coming to about 15% of assets and consumer discretionary another 18.15%, while financial-services names, at nearly half the portfolio, have held up without Fed rate cuts, a strength the story attributes to earnings growth, improving credit quality and solid local and regional economies.

The construction is the point for allocators: XSVM is not a value fund with a momentum overlay so much as a momentum fund that consults value on sizing. Momentum controls the door; value controls the weights. The outperformance over both benchmarks this year reflects the momentum gate, rather than the value weighting, doing the work at a moment when the two styles are otherwise dead even. The small-cap value revival may be real, but this ETF's 200-basis-point lead over both benchmarks came from the momentum gate.