Recovering economy boosts betting on S&P 500 ETFs
TThe S&P 500 has been flying higher and hitting new highs lately. This is especially true in the context of a rapidly recovering economy supported by continued progress in the development of more COVID-19 vaccines, rapid vaccine deployment, the reopening of the economy as well as a new stimulus of 1 , $ 9 trillion (read: 10 sector ETFs soar with a recovering economy).
The combination of these factors has led to a higher demand for all types of products and services in the economy. In particular, Americans will spend on big ticket items like vacations and weddings, businesses will continue to recruit, and the transition to new technologies like electric vehicles will accelerate. In addition, signs of a labor market recovery and optimistic earnings with rising earnings estimates for the next few quarters bode well for economic growth.
Many analysts are optimistic about the economy given the encouraging developments associated with a new stimulus package. Jefferies expects GDP growth of 9.5% in the first quarter and nearly 7% for this year while Goldman forecasts that the economy will grow 5.5% in the first quarter and then accelerate to 11% in the second. New York Federal Reserve Chairman John Williams predicts GDP growth will be the strongest this year in decades with strong federal fiscal support and continued progress on immunization.
When the economy improves, the stock market booms. According to Reuters poll last month, the S&P 500 index will likely hit 4,000 by the end of this year. Many Wall Street strategists have raised their price target on the S&P 500 with Swiss credit increase target price from $ 4,200 to $ 4,300 by year end.
However, the recent sell-off in the tech sector appears to have affected the S&P 500 somewhat, as yields are rising sharply. Higher rates tend to hit the tech industry hard as it relies on easy borrowing for higher growth. The value of tech stocks is highly dependent on future earnings, and as long-term returns rise, it lowers the present value of future corporate earnings (read: Bet on cash-rich tech ETFs and stay clear of the rout).
How to play?
In the context of an economic recovery, investors wishing to participate in the rally of the S&P 500 index may consider ETFs that track the index. While these funds are similar in terms of asset allocation, with Apple AAPL and Microsoft MSFT taking the top two spots and having a Zacks ETF Rank # 3 (Hold), there are few key differences between them. We have highlighted the differences below:
SPDR S&P 500 ETF Trust SPY
Launched in January 1993, SPY is the ultra-popular and oldest US equity ETF with an AUM of $ 332.7 billion. It is the most actively traded fund with an average daily volume of around 69.7 billion and an expense ratio of 0.09%. The fund is structured as a unitary investment trust (UIT) with State Street as the trustee. It is therefore not authorized to reinvest dividends paid by the underlying holdings, but must hold them in cash until they are distributed to the shareholders of SPY. In addition, SPY does not lend securities from its portfolio to earn extra money.
iShares Core S&P 500 ETF IVV
With an AUM of $ 254.3 billion, IVV is much smaller than SPY and less liquid, with an average daily volume of 3.8 million. This ensures an additional cost in the form of a marginal bid / ask spread. The fund is the cheapest choice in the space, charging just 3 basis points (bps) in annual fees, which is 6 bps less than the State Street product. Additionally, the product can lend stocks to earn extra and reinvest dividends in the index until they are paid quarterly (read: 6 February Red-Hot ETFs).
Vanguard S&P 500 ETF VOO
Although it has a similar structure and expense ratio as the iShares product, the average daily volume is relatively similar at 3.6 million shares. VOO has amassed $ 198.9 billion in its asset base.
Leverage play: a short-term victory
Investors keen to take on additional risk might opt for leveraged ETFs that track the index. These funds create a leveraged long position (2x or 3x) in the underlying index through the use of swaps, options, futures and other financial instruments. Although these funds provide disproportionate returns in a short period of time, they could lead to huge losses compared to traditional funds in fluctuating or oscillating markets (see: all leveraged equity ETFs here).
ProShares Ultra S & P500 ETF SSO
It is the most popular and liquid ETF in the leveraged space with an AUM of $ 3.1 billion and an average daily volume of over 2 million shares. The fund seeks to offer twice the return of the index, charging investors 91 basis points in fees per year.
Direxion Daily S&P 500 Bull 2x SPUU Shares
While this product also offers 2X exposure to the index, it charges a lower fee of 60bp. It has a lower level of $ 26.5 million in AUM and sees a lower volume of about 17,000 shares per day on average.
ProShares UltraPro S & P500 ETF UPRO
This fund offers 3X exposure to the index with a higher expense ratio of 0.93%. Average trading volume is strong, trading around 4.8 million shares per day on average. It has amassed $ 1.9 billion in its asset base (read: A $ 1.9 T stimulus to stimulate demand for US equities? ETF to win).
Direxion Daily S&P 500 Bull 3x SPXL Shares
Like UPRO, this fund also creates a 3X long position in the S&P 500 Index with an expense ratio of 0.95%. It has an AUM of $ 1.7 billion and cash and trades at an average daily volume of nearly 6.3 million shares.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.