After Beating the S&P 500 in 2024, This Vanguard Growth ETF Is Already Up Over 6% in 2025

The Vanguard U.S. Momentum Factor ETF (NYSEMKT: VFMO) narrowly beat the S&P 500 in 2024. But it is already up 6.3% year to date as of Jan. 26, outperforming the S&P 500's 3.7% gain.

Here's why the exchange-traded fund (ETF) is one of the more unique ETFs out there, why it could continue outperforming the S&P 500, and why investors might want to be cautious when approaching the fund.

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Understanding quantitative funds

The Vanguard U.S. Momentum Factor ETF uses a rules-based quantitative model to invest in stocks with the best recent performance -- hence the term "momentum." The fund will pile into hot stocks and abandon underperforming names.

The strategy works well if hot stocks stay hot, which has largely been the case in recent years.

The fund is unique because it is highly diversified -- holding 693 stocks with no individual holding making up more than 1% of the fund. This is a completely different structure than, say, the S&P 500, which is extremely top-heavy. Just 10 companies make up a staggering 38.6% of the Vanguard S&P 500 ETF (NYSEMKT: VOO), whereas the top 10 holdings in the Momentum ETF make up just 9.2% of the fund.

The S&P 500 is market-cap weighted, so the most valuable companies carry the highest weight. But the Momentum ETF is not market-cap weighted. Its holdings include small-cap, mid-cap, and large-cap companies, although most of the top holdings are large caps.

For example, Nvidia is the second most valuable company in the S&P 500, behind Apple. Nvidia has a 6.6% weighting in the Vanguard S&P 500 ETF. It is also a top 10 holding in the Momentum ETF due to its rapid run-ups in 2023 and 2024. But because the Momentum ETF is so diversified, Nvidia makes up just 0.8% of the fund.

Momentum no matter what

Since the tech sector has grown so much in value, led by Apple, Nvidia, Microsoft, Broadcom, and other names, it now makes up a staggering 32.5% of the Vanguard S&P 500 ETF. Tech has a lot of momentum as well, so it's a key sector in the Momentum ETF, but it's far less dominant. In fact, the largest weighted sector in the Momentum ETF at the time of this writing is financials, with a 22.6% weighting, followed by industrials at 19.99% and consumer discretionary at 15%.

Financials are red-hot. It was one of the best-performing sectors in 2024 and has carried that momentum forward in 2025 -- with the big banks and payment processors like Visa, Mastercard, and American Express hitting all-time highs.

Scanning the list of holdings in the Momentum ETF will yield some interesting finds. For example, the energy sector drastically underperformed the S&P 500 in 2024. But midstream pipeline and infrastructure stocks soared. So Williams Companies and Oneok, which are known more as income stocks than growth stocks, are both among the top 20 holdings in the ETF.

Similarly, AT&T -- a high-yield stodgy company that has gained 18.4% in the last six months -- is a top 20 holding. Walmart, a Dividend King with over 50 consecutive years of raising its payout, pole-vaulted a staggering 71.9% in 2024. Unsurprisingly, it is also in the top 20 holdings of the Momentum ETF.

The key takeaway is the fund's holdings can change a lot based on recent performance. If tech stocks cool off, the U.S. Momentum Factor ETF will shift to other sectors, whereas the S&P 500 is so tech-heavy that tech stocks could fall by 50%, and it would still be the biggest sector in the index.

Data by YCharts.

How to approach the Momentum ETF

Due to its structure, the Momentum ETF goes against the principles of long-term investors, which are to identify companies you believe will grow in value over time and hold those positions through periods of volatility. In contrast, the Momentum ETF just trades in and out of whatever is hot in the market.

When looking at ETFs to buy, it's best to focus on companies or themes to build around. For example, if you want to invest in the broader market, but like value stocks, you may want to take a closer look at the Vanguard Value ETF. Like growth stocks instead? Then there's the Vanguard Growth ETF.

The holdings in these funds don't change too much. Rather, the weightings will fluctuate based on performance. So you can approach the funds through the lens of long-term investing.

In general, I think most investors are better off targeting other low-cost Vanguard ETFs that include top holdings they like rather than diving headfirst into the U.S. Momentum Factor ETF.

The U.S. Momentum Factor ETF is all about buying whichever stocks are going up, it doesn't take valuation or fundamentals into account. So if you're a value-focused or risk-averse investor, you could use the ETF almost like a hedge on a red-hot market.

Another interesting quality of the ETF is that it can perform surprisingly well during big growth stock sell-offs. For example, in 2022, the fund lost 14.3%, which wasn't as bad as the 19.4% decline in the S&P 500 or the 33.1% tumble in the Nasdaq Composite. Because while the composition of the indexes won't really change during a bear market, the U.S. Momentum Factor ETF will dump whatever is selling off and hop into whatever is working based on its quantitative model.

Over the long run, this strategy has shown to be a rather fruitless endeavor, as the U.S. Momentum Factor ETF has produced a 141.5% total return over the last decade compared to 157.6% for the S&P 500 and 202.2% for the Nasdaq Composite.

So again, the U.S. Momentum Factor ETF should be viewed more as a tool rather than an ETF to build your portfolio around. However, some investors may be better off avoiding the fund altogether and focusing on more straightforward investment vehicles.

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American Express is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Mastercard, Microsoft, Nvidia, Vanguard Index Funds - Vanguard Growth ETF, Vanguard Index Funds - Vanguard Value ETF, Vanguard S&P 500 ETF, Visa, and Walmart. The Motley Fool recommends Broadcom and Oneok and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.