S&P 500 on the rise: ETFs to drive the rally
TThe S&P 500 has had a rally this year, ignoring a myriad of concerns, including inflationary pressures and the Delta variant’s increase in COVID-19 cases. Higher than expected profits are the main catalysts right now. The second quarter earnings picture was one of the strongest, with aggregate total quarterly earnings on track to reach a new all-time high and impressive momentum on the revenue side.
Profits for the 378 S&P 500 members who have reported so far are up 103.8% from the same period last year, with revenues 28.2% higher, 87.3% exceeding BPA estimates and 86.5% exceeding revenue estimates. Combining the results provided with estimates for upcoming companies, the total earnings of the S&P 500 index are expected to be up 89.7% from the same period last year for higher earnings of 23.5%. %. This would follow 49.9% profit growth on higher earnings of 10.3% in the first quarter of 2021 (read: A spread of major S&P 500 ETFs to take advantage of strong earnings growth in the second trimester).
Plus, optimistic data sets fuel the strength. The US economy has returned to pre-pandemic levels with GDP growing 6.5% per year in the second quarter, indicating the continued resumption of the pandemic recession. Rapid vaccinations, business reopenings and billions of dollars in government stimulus spending fueled consumer spending and led to robust growth. Consumer confidence hit a 17-month high in July, suggesting that consumer spending should support robust growth in the second half of this year.
The combination of factors paved the way for the S&P 500 Index to hit new highs as the end of the year approaches. Falling interest rates will continue to fuel the economy, leading to increased purchasing power.
Driven by strong earnings growth and lower rates, Goldman Sachs raised its 2021 target on the S&P 500 from 7% to 4,700 from 4,300, implying a further rise for the benchmark, which is already up 17% so far this year. After raising the index’s target price, Goldman became Wall Street’s biggest bull. Compared to consensus, Goldman strategists expect stronger revenue growth and greater pre-tax profit margin expansion as companies successfully manage costs and high-margin tech companies become a larger share of the index.
How to play?
In such a bullish environment, investors looking to participate in the S&P 500 index rally might 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 # 2 (Buy), there are few key differences between them. We have highlighted the differences below:
SPDR S&P 500 ETF Trust ESPION
Launched in January 1993, SPY is the oldest and most popular U.S. equity ETF with $ 384.6 billion AUM. It is the most actively traded fund with an average daily volume of around 54.6 billion and an expense ratio of 0.09%. The fund is structured as a Unit Investment Trust (UIT) with State Street as a 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 $ 296.8 billion AUM, IVV is much smaller than SPY and less liquid, trading in an average daily volume of 3.9 million shares. This guarantees an additional cost in the form of a marginal supply / demand gap. The fund is the low-cost choice in the space, charging just 3bp in annual fees, 6bp less than the State Street product. Additionally, the product can lend stocks to earn additional dividends and reinvest in the index until they are paid quarterly (read: Hottest New ETFs of 2021).
Vanguard S&P 500 VOO ETF
Although it has a similar structure and expense ratio as the iShares product, the average daily volume is relatively similar at 3.5 million shares. VOO has amassed $ 246 billion in its asset base.
Leverage gambling: a short-term victory
Investors willing to take 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. While these funds offer disproportionate returns over a short period of time, they could lead to huge losses compared to traditional funds in fluctuating or sawtooth 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 $ 4.3 billion and an average daily volume of around 1.6 million shares. . The fund seeks to offer 2 times the return of the index, charging investors a 0.91% expense ratio.
Direxion Daily S&P 500 Bull 2x SPUU Shares
While this product also provides 2X exposure to the index, it charges a fee that is 60 basis points lower. It has a lower level of $ 34.4 million in assets under management and sees a lower volume of about 14,000 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 3.8 million shares per day on average. It has amassed $ 2.7 billion in its asset base.
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 assets under management of $ 2.7 billion and is liquid and trades an average daily volume of almost 5 million shares.
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Apple Inc. (AAPL): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
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
ProShares Ultra S & P500 (SSO): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
IShares Core S&P 500 ETF (IVV): ETF Research Reports
Direxion Daily S&P 500 Bull 2X Shares (SPUU): ETF Research Reports
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