Now What For S&P 500 ETFs After Rally?

April 5th at 10:00am by Tom Lydon

The S&P 500 Index has roughly doubled from its credit-crisis low, but many small investors haven’t bought into the historic rally in U.S. stocks.

The S&P 500 is known as a barometer of U.S. economic health. The index has rallied about 97% and pulled stock exchange traded funds (ETFs) higher even though many investors remain worried about the economy and job market.

Still, S&P 500 earnings are poised to surpass the 2007 peak of $90 a share in the third quarter after surging from $7 in March 2009, says Rita Nazareth and Michael Patterson for Bloomberg. Recent data indicate that the gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951.

Some anticipate that the investors who have sat on the sidelines thus far will help advance the index further with future purchases, even while earnings may become sluggish later this year. Thus far, retail investors took money out and hedge funds have plowed in, reflecting the low confidence that individual investors have been plagued with. [How To Play The S&P 500 With ETFs.]

Main Street investors have not bought into the rally even though some indicators are looking up. Labor reports are better, economic momentum is evident and the earnings picture is healthy, reports CNBC on Yahoo Finance.

The rally has been spurred on by the big hedge funds and institutional investors that have access to large chunks of capital. As more small investors begin to follow, and trickle back into the equity markets, the effect should be a longer, more sustained recovery within the S&P 500.[S&P 500 Poised For Highest Level Level Since 2008.]

The S&P 500 is hovering around the 1,333 mark, which it has not broken through since mid-February, says Angela Moon for Reuters. With earnings season looming, analysts are looking for the famous index to break through the resistance to 1400 by mid-May. As of last Friday, the S&P 500 recorded its best two-week period since December. Look for earnings reports next week, which will give a better picture of the vigor in the markets.

Various ETF plays on the S&P 500 include:

  • SPDR S&P 500 (NYSEArca: SPY): Up 4.9% over past 3 months. It’s not only the granddaddy of all ETFs, it’s the largest ETF, period. If you want exposure to the 500 largest companies and play the economic recovery, then this fund delivers it with a competitive 0.10% expense ratio.
  • iShares S&P 500 (NYSEArca: IVV): Up 4.9% over the past three months; Tracks the same index as SPY, with top holdings ranging from Exxon Mobil, 5.2%; Procter & Gamble (PG), 2.4% and General Electric, 2.2%. IVV charges less than SPY.
  • Schwab U.S. Large-Cap Growth ETF (NYSEArca: SCHG): Up 5.2% over past three months; Schwab’s large-cap ETF comes in with an expense ratio of 0.13%. It also gives almost the same level of exposure to large-caps that SPY does, with 432 holdings.
  • Rydex S&P Equal Weight ETF (NYSEArca: RSP) Up 6.6% over past three months; RSP has nearly identical holdings to the S&P 500, but gives an equal weighting to each individual stock, 0.20% to each of the 500 stocks.   In periods where small-caps are outperforming – generally in recoveries – this strategy can be favored.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.