As market conditions shift, exchange traded fund investors should be willing to adapt and focus on areas of the market that look more promising ahead.
Goldman Sachs is advising investors to underweight the S&P 500 and look for other indices, like the Nasdaq, that have more upside, reports Julie Verhage for Bloomberg.
“We expect the S&P 500 will reach 2100 by year-end, representing a 2% price gain from the current level,” Goldman analysts said. “Given limited S&P 500 upside, we recommend investors buy the Nasdaq 100, which trades at a modest P/E premium to the S&P 500 (18x vs. 17x) despite having much higher expected EPS growth (14% vs. 5%).”
Investors who are interested in the Nasdaq 100 can utilize the the PowerShares QQQ (NasdaqGM: QQQ) to track the tech heavy index. QQQ currently shows a 20.1 price-to-earnings ratio and a 3.9 price-to-book. Meanwhile, the SPDR S&P 500 ETF (NYSEArca: SPY) has a 18.2 P/E and a 2.6 P/B.
Additionally, the investment bank is bullish on the technology, energy and telecommunication services sectors.
For tech exposure, there are a number of broad ETFs to select from, including the Technology Select Sector SPDR (NYSEArca: XLK), iShares U.S. Technology ETF (NYSEArca: IYW) and Vanguard Information Technology ETF (NYSEArca: VGT). XLK tracks the tech sector from the S&P 500 index. IYW also tracks a similar group of tech companies taken from the Dow Jones U.S. Technology Index and does not include telecom stocks. VGT, on the other hand, includes a small position in information technology services companies. Year-to-date, XLK rose 0.5%, IYW added 0.3% and VGT returned 1.1%.
After falling off in response to the plunge in oil prices, many investors are looking at energy ETFs, like the Energy Select Sector SPDR (NYSEArca: XLE), Vanguard Energy ETF (NYSEArca: VDE) and iShares U.S. Energy ETF (NYSEArca: IYE), as a value play. XLE tracks the energy component of the S&P 500. VDE and IYE, though, include a broader mix of energy companies. Year-to-date, XLE dipped 1.4%, VDE fell 1.9%, and IYE declined 1.8%.
Lastly, investors can gain telecom exposure through broad ETFs like the iShares U.S. Telecommunications ETF (NYSEArca: IYZ), Vanguard Telecommunication Services ETF (NYSEArca: VOX) and Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM). IYZ tracks the Dow Jones U.S. Select Telecommunications Index. VOX and FCOM are more top heavy, both allocating about 22% in Verizon (NYSE: VZ) and AT&T (NYSE: T). Year-to-date, IYZ increased 6.3%, VOX rose 3.4% and FCOM advanced 3.4%.
On the other hand, Goldman is underweight financials, consumer staples and industrials, along with the S&P 500 index.
For more information on the markets, visit our current affairs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of SPY and QQQ.