The world’s best investors often succeed because they let their winning stocks run while quickly cutting their losers. In fact, top fund managers including Paul Tudor Jones, Peter Lynch, and Ed Seykota cite this approach as a core part of their respective strategies.
The Vanguard U.S. Momentum Factor ETF (VFMO +1.33%) is an exchange-traded fund (ETF) that exclusively invests in winners. It uses a mathematical model to identify stocks with upward momentum, placing a higher emphasis on those showing sustained returns over the past 12 months of trading.
The ETF is up 17% so far in 2026, crushing the S&P 500 (^GSPC +1.48%) index, which is sitting on a gain of just 9.4%. But its recent outperformance isn’t a one-off, because the fund has beaten the market on average every year since it launched in 2018.
In other words, its strategy appears to be working, and here’s why it might be a great buy for the long term.
Image source: Getty Images.
Hundreds of winners packed into one ETF
The mathematical models behind the Vanguard U.S. Momentum Factor ETF select stocks by assessing their 12-month performance, but they also look closely at the last six months to ensure the trend remains intact. Vanguard’s models also run calculations to make sure a stock is rising based on its own fundamentals, not because the broader market is trending higher.
The ETF was holding 670 stocks from across nine different economic sectors as of July 31, and the following five sectors had the highest weightings:
- Technology: 25.6%
- Industrials: 19.7%
- Healthcare: 18.3%
- Energy: 12.8%
- Consumer discretionary: 7.5%
Applied Materials, Sandisk, and Advanced Micro Devices are the top three individual holdings in the Vanguard ETF, and all of them are from the technology sector. It’s no surprise given their respective 12-month returns of 182%, 2,840%, and 177%, fueled by soaring demand for data center chips and components from the artificial intelligence (AI) industry.
Industrial companies have also experienced a surge in demand from the AI industry, as data center operators frantically seek electricity solutions to power their infrastructure. This trend is benefiting GE Vernova and Caterpillar, which are among the top 20 holdings in the ETF.
But the stocks at the top of this ETF today might not be there for long, because it has a very high turnover rate of 99.9%. That means the fund can be expected to replace almost every holding in its portfolio over the course of a year, which proves momentum is often fleeting. If there’s a stock that soars higher for multiple years in a row, investors can be sure it will be in this fund, but that’s quite rare.
Not even Nvidia has maintained its place in the ETF, because it’s underperforming the S&P 500 this year.
History suggests the Vanguard ETF can continue beating the market
The Vanguard U.S. Momentum Factor ETF has delivered a compound annual return of 14.8% since it launched in 2018, beating the S&P 500, which returned an average of 14.1% per year over the same period.
Vanguard Wellington Fund – Vanguard U.s. Momentum Factor ETF
Today’s Change
(1.33%) $2.97
Current Price
$226.69
Key Data Points
AUM
$2.0B
Dividend Yield
0.62%
Expense Ratio
0.13%
Top Holdings
KLAC
1.24%
AMAT
1.22%
MU
1.22%
There have been a few severe market downturns since then, caused by the COVID-19 pandemic in 2020, the inflation surge in 2022, and the Trump administration’s sweeping tariffs in 2025, yet this ETF has still come out ahead of the S&P 500. That suggests its momentum-driven strategy, which also involves cutting losers when momentum turns, is working, so there’s a good chance it will continue beating the market over the long term.
And it should continue working no matter what industry the best-performing stocks are coming from. AI stocks might be driving the market higher today, but the ETF’s mathematical models will identify any potential change in leadership and rotate its holdings accordingly.
One downside to this ETF might be its cost. Its expense ratio of 0.13% translates to an annual fee of $13 for every $10,000 invested, which isn’t much at face value, but it’s four times as costly to hold as many of Vanguard’s passive index funds, which have expense ratios of just 0.03%.
