S&P 500 To Roar Higher: ETFs To Ride The Rally

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The S&P 500 has been enjoying a rally this year, shrugging off myriad concerns including inflationary pressures and rising Delta variant of COVID-19 cases. Stronger-than-expected earnings are the major catalysts at present. The Q2 earnings picture has been one of all-around strength, with aggregate total quarterly earnings on track to reach a new all-time record and impressive momentum on the revenue side.

Earnings for 378 S&P 500 members that have reported so far are up 103.8% from the same period last year on 28.2% higher revenues with 87.3% beating EPS estimates and 86.5% topping revenue estimates. Combining the results that have come up with estimates for the still-to-come companies, total earnings for the S&P 500 Index are expected to be up 89.7% from the same period last year on 23.5% higher revenues. This would follow 49.9% earnings growth on 10.3% higher revenues in Q1 of 2021.

Additionally, rounds of upbeat data are fueling strength. The U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter, indicating the sustained recovery from the pandemic recession. Rapid vaccinations, business reopenings, and trillions of dollars of government stimulus spending powered consumer spending and resulted in robust growth. Consumer confidence rose to 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 has set the stage for the S&P 500 Index to make new highs as we move toward the end of the year. Lower interest rates will continue to fuel the economy, leading to higher spending power.

Buoyed by strong earnings growth and lower rates, Goldman Sachs lifted its 2021 target on the S&P 500 by 7% to 4,700 from 4,300, implying further upside for the benchmark, which is already up 17% so far this year. After increasing the target price on the index, Goldman has become the biggest bull on the Wall Street. Relative to consensus, Goldman strategists expect stronger revenue growth and more pre-tax profit margin expansion as firms successfully manage costs and as high-margin tech companies become a larger share of the index.

How to Play?

Against such a bullish backdrop, investors seeking to participate in the S&P 500 Index’s rally could consider ETFs that replicate the index. While these funds look similar in terms of the holdings breakdown with Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) 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 (SPY - Free Report)

Launched in January 1993, SPY is the ultra-popular and the oldest U.S. equity ETF with AUM of $384.6 billion. It is the most actively traded fund with an average daily volume of around 54.6 billion and 0.09% in expense ratio. The fund is structured as a Unit Investment Trust (UIT) with State Street serving as the trustee. It is therefore not allowed to reinvest dividends paid by underlying holdings but must hold them in cash until they are scheduled to be distributed to SPY shareholders. Additionally, SPY does not lend out securities from its portfolio to earn extra money.

iShares Core S&P 500 ETF (IVV - Free Report)

With AUM of $296.8 billion, IVV is a lot smaller than SPY and less liquid, trading in an average daily volume of 3.9 million shares. This ensures some additional cost in the form of a marginal bid/ask spread. The fund is the low-cost choice in the space, charging just 3 bps in annual fees, 6 bps less than the State Street product. Additionally, the product can lend out shares to earn extra and reinvest dividends in the index until paid out quarterly.

Vanguard S&P 500 ETF (VOO - Free Report)

Though it has a similar structure and expense ratio as that of the iShares product, the average daily volume is relatively similar at 3.5 million shares. VOO has amassed $246 billion in its asset base.

Leveraged Play: A Short-Term Win

Investors willing to take extra risk could go for leveraged ETFs that track the index. These funds create a leveraged (2X or 3X) long position in the underlying index through the use of swaps, options, future contracts, and other financial instruments. While these funds provide outsized returns in a short span, they could lead to huge losses compared to traditional funds in fluctuating or seesaw markets.

ProShares Ultra S&P500 ETF (SSO - Free Report)

This is the most popular and liquid ETF in the leveraged space with AUM of $4.3 billion and an average daily volume of around 1.6 million shares. The fund seeks to deliver 2X the return of the index, charging investors 0.91% in expense ratio.

Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report)

While this product also provides 2X exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $34.4 million in AUM and sees a lower volume of about 14,000 shares a day on average.

ProShares UltraPro S&P500 ETF (UPRO - Free Report)

This fund provides 3X exposure to the index with a higher expense ratio of 0.93%. The average trading volume is solid, exchanging about 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 Shares (SPXL - Free Report)

Like UPRO, this fund also creates a 3X long position in the S&P 500 Index with 0.95% in expense ratio. It has AUM of $2.7 billion and liquid and trades in an average daily volume of nearly 5 million shares.

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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