3 ETFs To Buy As The S&P 500 Breaks Out To New Highs

Last week, the S&P 500 decisively broke out to a new, all-time high, crossing the 4,000 level on strong volume. This followed a multi-month consolidation period that saw inflows into cyclical and value stocks, while frothier and more speculative parts of the market saw deep corrections.

The primary catalyst for this market action was the rise in long-term rates and an increase in growth expectations. Over the last two months, the 10Y Treasury has risen from 1% to 1.7%. Higher rates and accelerating economic growth make high-multiple and speculative stocks less attractive, while these conditions boost the profitability of value and cyclical stocks. 

Looking ahead, I believe the rally in the market will continue, with all the major indexes participating in the advance (unlike the last two months). Three ETFs that investors should consider buying are the iShares Russell 2000 ETF (IWM - Get Rating)Health Care Select Sector SPDR Fund (XLV - Get Rating), and the Invesco QQQ Trust (QQQ - Get Rating)

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Market Outlook

Before we analyze these ETFs, let’s take a step back to evaluate the current economic conditions. 

Regarding market conditions, I believe that the correction in “frothy” stocks and rotation into value stocks was a healthy development for the bull market’s longevity. Many traders and funds who were deploying excess leverage were punished, while prudent investors have an opportunity to add exposure to stocks at lower prices.  

At the same time, the economic outlook continues to improve. According to the CDC, about 31% of Americans have received their first dose, while 17% are fully vaccinated. Additionally, data shows the vaccines are effective in terms of minimizing asymptomatic spread, and early clinical trials are showing it working in children with minimal adverse effects. These developments increase the odds that the economy should be able to return to normal by the end of the year.

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