After an impressive run, investors are growing wary about an overbought market. Nevertheless, stock exchange traded funds could still have some legs.
U.S. price-to-earnings ratios jumped 19% last year, but expanding multiples have preceded broad stock market advances twice as often as retreats, reports Whitney Kisling for Bloomberg.
Since 1936, the S&P 500 has gained 69% of the time in the period following quarters when valuations expanded, averaging 14% returns in years after over 400 constituents in the index rose.
“One sign that things are becoming more popular is they’re more expensive,” Michael Shaoul, chief executive officer of Marketfield Asset Management LLC, said in the article. “I would be quite surprised if this bull market didn’t continue for another two to three years.”
Nevertheless, some caution that investors should not expect a repeat of last year’s surge.
“While valuation is by no means grossly overvalued, current levels suggest it may be more difficult for the market to continue its impressive run without equally impressive earnings growth,” Brian Belski, the chief investment strategist at BMO, said.
Investors interested in taking broad exposure to the S&P 500 can take a look at the SPDR S&P 500 (NYSEArca: SPY), Vanguard S&P 500 ETF (NYSEArca: VOO) or iShares S&P 500 Index (NYSEArca: IVV). [S&P 500 ETFs Open Doors to Facebook]
SPY is different from the other two major S&P 500 ETFs in that it is set up as a unit investment trust which must replicate its index and has limits such as prohibiting lending out underlying shares to other firms. [Comparing Three S&P 500 ETFs]
IVV is the second largest S&P 500 ETF trading. The iShares ETF uses strategies such as derivatives and portfolio lending which allows it to make a small, additional profit. This helps the fund keep pace with the benchmark. The risk is in the portfolio lending, if securities are not returned by the borrowing firm.
VOO has the same freedom as IVV, with stock lending and reinvesting, and cash is invested daily into Vanguard money market funds. Additionally, VOO is the cheapest S&P 500 ETF with a 0.05% expense ratio.
For more information on the S&P 500, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.