Several major indices have notched all-time highs over the last week as the core of the market continues to flex its muscles from a technical perspective. SPX was the latest to do so, punching to uncharted territory with action late last week before continuing higher on 6/30 to start an abbreviated trading week. The core of the market (as defined by the Asset Class Group Scores page) continues to rank highly after a hiccup in April, outscoring nearly 94% of the other 133 groups on the page. All of this confirms an idea most of us are quite familiar with at this point… the technical stature of the S&P 500 is still quite strong.  

One area that hasn’t been talked about that much in recent research has been small caps. The group’s inability to sustain any semblance of upside action leaves a bad taste in trend followers’ mouths… and for good reason. Somewhat convincing upside action in late 2024 was then followed up with a swift breakdown throughout 2025, seeing RUT down nearly 24% at its worst on its default chart back in April of this year. Since then, the Russell 2000 has broken back into a positive trend and posted an impressive string of six buy signals on its chart… but is still in the red for the year and the broader small cap group still scores below NDW’s technically acceptable 3.0 score threshold.

Still nearly 13% off all-time highs as of 6/30/2025, the analyst team wanted to explore the idea of a “catch-up trade” for small-caps. Said otherwise, does the “a rising tide lifts all ships” saying apply to SPX & RUT? To answer this question, we isolated instances (excluding one-month clusters) where the S&P 500 printed a new all-time high while the Russell 2000 was 10% (or more) off its own respective all-time high. From there, we computed forward returns for the 18 (excluding 2025) instances dating back to 1980. The table is included below. Note that these datapoints use closing prices only.

There are a few things to note after digesting the data. First are foremost, “typical” returns for both SPX and RUT across the timeframes are strong, hitting slightly above long-run averages for both indices. Next, average returns for RUT outpace SPX across the dataset… albeit somewhat marginally. As you would expect, returns for small caps are also less consistent, seeing the range between high and low values wider across the board.

Unfortunately, the returns don’t seem to provide a conclusive answer either way for our initial question of whether small caps are due for a bit of catch up throughout the back half of 2025. Despite this, there is perhaps an unintentional finding: the idea that all-time highs for SPX without participation from small caps hasn’t historically been a roadblock for continued upside action as SPX looks to improve on its year.

The second quarter of 2025 started off on uncertain footing that ultimately gave way to broad rallies back to new all-time highs by the end of June. That led the S&P 500 Index SPX to return more than 5% for the first half of the year. Trend following approaches had a difficult three months, as the turbulent market environment led to several leadership changes.

The performance table below compares the price return of the Invesco Dorsey Wright Momentum ETF PDP and the Invesco Dorsey Wright SmallCap Momentum ETF DWAS to their respective benchmarks in the first half of the year, while the two bottom tables compare their H1 return against the same timeframe in prior years. Both momentum funds trailed their respective benchmarks over the last three months amidst the shifting leadership.

Our approach toward momentum through relative strength analysis looks to capitalize on consistent trends across the market. Changing trends cause the portfolios to readjust to maintain exposure to the strongest areas. Underperformance is typical during those environments as areas that had demonstrated relative strength fall in our rankings. The most important step in our approach comes next – those areas that have declined in strength are sold to make room for the new leaders. Any investment process is going to produce a portfolio of winners and losers. Relative strength analysis gives us a systematic way to cull the losers and constantly push the portfolio toward the strongest areas of the market.  

In the most recent quarter (Q4) we saw 48 changes (out of 100 holdings) in PDP and 94 changes (out of 200 holdings) in DWAS, repositioning both portfolios toward areas of leadership as we enter the second quarter. That is less than what we saw in the prior quarter, but still more than we saw throughout periods of consistent leadership last year.

Below you'll find an update about the specific changes made in both strategies with the most recent index reconstitution. Keep in mind that removed positions likely no longer maintain characteristics of superior relative strength; meanwhile, additions have improved to a place of leadership and could be ideas to consider.

Invesco DWA Momentum ETF (PDP)

The stock-selection process behind the Invesco Dorsey Wright Momentum ETF (PDP) is simple yet robust. Every quarter, we apply the Relative Strength process to compare approximately 1,000 large and mid-cap US stocks and select the strongest 100 names. The quarterly reconstitution process's goal is to weed out the weak names and realign the portfolio toward strength. As mentioned before, with this most recent reconstitution and rebalance, we removed 48 stocks and added 48 new stocks, which we've compiled in the tables below. Several observations:

• Technology saw the largest number of holdings added to the overall portfolio, followed closely by industrials.
• Financials saw the largest number of names removed from the strategy, while also accounting for the third most additions. The shifting strength has been on display between the sectors but also within the sector constituents themselves.
• Still, financials saw the largest net loss of names, followed by real estate, which did not see any additions.
• AAPL was one of the more notable removals from that portfolio, as it has stagnated over the past several months. ORCL is among the notable additions.

Invesco DWA SmallCap Momentum ETF (DWAS)

The stock-selection process used in DWAS is like PDP. Every quarter, we apply the Relative Strength process to compare approximately 2,000 US-listed small-cap stocks and select the strongest 200 names. With this most recent reconstitution and rebalance we pushed the portfolio towards strength by removing 94 stocks and adding 94 new stocks, which we've outlined in the table below. However, and perhaps unique to DWAS, not all stocks that were removed are technically weak. We have received this question in the past, so we want to address it here.

One reason for these removals is due to stocks exceeding the market cap filter. High-momentum stocks should, ideally, increase in market cap which means that sometimes a name will exceed the small-cap maximum at the end of a quarter. This is not the norm, but worth keeping in mind when reviewing the changes. Several takeaways:

• Industrials saw the most names added, followed by Technology. This furthers the sector leadership trends established in the large-cap space.
• Health care saw the largest number of deletions after having the most number of additions last quarter. This exemplifies the prior point around trimming losers from the portfolio.
• All sectors but real estate saw some sort of addition in the most recent quarterly evaluation, and all 11 saw removals. That speaks to the lack of consistent leadership in the small-cap space when compared to large-caps.

Disclosures:

This article is intended for Financial Professional Use Only.

Management and other expenses can have a material impact on performance when compounded over time. Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown.

Click here for more information from Invesco on the Invesco DWA Momentum ETF (PDP): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=PDP

Click here for more information from Invesco on the Invesco DWA SmallCap Momentum ETF (DWAS): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&productId=ETF-DWAS

Dorsey, Wright & Associates, LLC is owned by Nasdaq, Inc. and we have affiliates who also provide financial services, research, information, and act as Brokers/Dealers to a wide variety of clients. Our affiliates use the information we create to create indexes, which are then used to create Exchange Traded Funds. These things create a potential conflict of interest in that we may have an incentive to promote or use the products and services of our affiliates and business partners. A number of Dorsey Wright representatives are registered with and hold securities licenses with the affiliate broker-dealers. In this capacity, they assist with the marketing and distribution of Exchange Traded Products.

Daily Option Ideas for June 30, 2025