Key Points
The Vanguard U.S. Momentum Factor ETF has a solid track record of beating the market.
This ETF invests in stocks of all sizes that have exceptional momentum.
The fund's high churn, though, makes it better suited for tax-advantaged accounts.
Warren Buffett thinks index funds are great investments for most people. He especially likes S&P 500 (SNPINDEX: ^GSPC) funds and holds Vanguard in high regard.
I fully agree with Mr. Buffett. However, the biggest knock against S&P 500 funds is that you're guaranteed to never outperform the market.
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Do you have to pick individual stocks to obtain higher gains than the S&P 500? Nope. The Vanguard U.S. Momentum Factor ETF (NYSEMKT: VFMO) could allow you to beat the market without barely lifting a finger.
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Riding the "big mo"
The Vanguard U.S. Momentum Factor ETF employs a simple strategy. It uses a rules-based mathematical model to find stocks with strong momentum over the last 12 months. This model also checks total returns over the last six months to ensure the uptrend hasn't fizzled out. The ETF buys the stocks that score the highest.
Typically, around 80% of those stocks will be based in the U.S. The percentage is currently much higher. Of the 670 holdings in the Vanguard U.S. Momentum Factor ETF's portfolio today, only 1.9% are outside the U.S.
Does this momentum strategy work? It does frequently. The Vanguard U.S. Momentum Factor ETF has delivered a higher total return than the S&P 500 in four of the last seven years (including 2026 year-to-date gains) and virtually tied the index in another year.
One advantage the Vanguard U.S. Momentum Factor ETF could have versus the S&P 500 over the long term is that it isn't limited to owning large-cap stocks. While large-cap stocks have been bigger winners in recent years, small-cap and mid-cap stocks have outperformed over long stretches in the past.
Vanguard's model evaluates stocks of all sizes. The current median market cap of the Vanguard U.S. Momentum Factor ETF's portfolio is $16.8 billion, only a fraction of the $455.6 billion median market cap of the Vanguard S&P 500 ETF (NYSEMKT: VOO).
Two considerations
No ETF will always beat the market. The Vanguard U.S. Momentum Factor ETF hasn't outperformed the S&P 500 every year. It's possible that this fund could experience a significantly steeper decline than the S&P 500 at times.
Also, the Vanguard U.S. Momentum Factor ETF has a high turnover rate -- a whopping 99.9% in its fiscal year ending Nov. 30, 2025. This churn makes the fund a better fit for tax-advantaged accounts, such as IRAs and 401(k) plans, than for taxable accounts, where capital gains distributions are taxed.
Still, if you're hoping to beat the market without much effort, the Vanguard U.S. Momentum Factor ETF could be just the ticket.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.