Guide to the S&P 500 ETF Investing

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The S&P 500 has been hovering around 4,449.49 at the time of writing, down only 7.7% from the all-time high. Solid U.S. economic data points, a boost in fiscal policies, vaccine distribution and pent-up demand helped the index. Tech stocks were mainly responsible for the S&P 500’s monumental achievement last year.

Since its inception in 1993, the fund SPDR S&P 500 ETF SPY is up 10.3%, with a 14.40% standard deviation. The index is down 6.6% this year and has been up 7.8% past year. The risk-off trade sentiments emanated from the Russia-Ukraine war and high inflationary pressure led to the lackluster performance of the S&P 500 this year.

Now, this leaves a big question about what lies ahead for the S&P 500 ETFs. This is especially true given that rising rate worries are prevalent in the U.S. market.

Will the S&P 500 gain further or move rangebound?

Gradual Rise in Rates Should Favor Cyclical Stocks

In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF (SPYG), we will see the fund returning 10.3% during that period while the value ETF (SPYV) was down 0.5%.

Hence, one should not fear rising rates before investing in the current market. Normally, cyclical sectors like consumer discretionary (which gets 11.73% weight in the S&P 500) and industrials (which gets 7.77% in the S&P 500) tend to do better in a rising rate environment.

Upbeat Earnings Potential

Per the Zacks Earnings Trends issued on Apr 6, 2022, the earnings of the index are projected to grow 3.2% in Q1, 2.8% in Q2, 7.1% in Q3 and 6.2% in Q4 of this year on revenue growth expectations of 10%, 8.4%, 7.6% and 5.3%, respectively.

S&P 500 Becoming IT-Heavy

The S&P 500 currently puts 26.83% of the fund in Information Technology. Apple (6.89%), Microsoft (5.73%) and Amazon (3.55%) are its top three holdings. About one-fourth of the fund is held in the top-10 section, out of which more than 20% goes to Information Technology. With tech stocks having upbeat long-term potential, the S&P 500 has strong chances of outperformance over the medium term.

This is especially true given the rising virus cases in various parts of the globe that might prolong the work-learn-shop-from-home culture. Overall, digitization is part and parcel of the modern era. The sector holds strong potential on the fast emergence of the fourth industrial revolution.

Investors should note that even amid a rising-rate environment, the technology sector has been enjoying positive estimate revisions prior to the release of the Q1 earnings of 2022. This speaks of the sector’s strength.

Healthcare to Remain Well Positioned

The healthcare sector holds 14.29% of the fund. The sector is defensive in nature. Amid the ongoing health emergency, no one can ignore the necessity of this sector, let alone the sector’s durability amid the growing need for medication and treatments for other critical diseases.

Bullish Analysts’ Ratings

Per the new data from FactSet, analysts had the most Buy ratings during February and March in more than a decade on stocks in the S&P 500 as a percentage of their total ratings. Of the 10,821 ratings on companies tracked by the benchmark, 57.3% had an investment analyst recommendation of Buy as of March 31, slightly trailing February at 57.4%. The last time the percentage of Buy ratings topped 55% at the end of any month was September 2011, at 55.8%, the firm indicated.

ETFs to Watch

Against this upbeat backdrop, investors may track S&P 500 ETFs like Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF IVV and SPY.

Investors can also play the growth part of the index with SPYG and the value part of the index with SPYV. SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index. SPYD yields 4.80% annually.

Investors can also bet on the leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 (SSO) and ProShares UltraPro S&P500 UPRO while the index is on an uptrend.

If the S&P 500 index shows a declining trend, then investors can play ProShares UltraPro Short QQQ SQQQ, ProShares Short S&P500 SH, ProShares UltraShort S&P500 SDS and ProShares Short QQQ PSQ.

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ProShares UltraShort S&P500 (SDS): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
Direxion Daily S&P 500 Bull 3X Shares (SPXL): ETF Research Reports
ProShares UltraPro S&P500 (UPRO): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
ProShares Short S&P500 (SH): ETF Research Reports
Proshares Short QQQ (PSQ): ETF Research Reports
SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
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