Image Source: Unsplash

• The SPY ETF is recording new high every week.
• FED is taking a cautious approach, taking their time to bring down inflation.
• Current market conditions do not point to a market top. SPY is poised to go higher.

The SPDR S&P 500 ETF, commonly known as SPY, has been a popular investment vehicle for years. From meme-stock inspired Reddit retail investors to those trying to follow a safe investing approach, this ETF has something for everyone.

But at a time when the SPY ETF is at its all time highs, the same question has resurfaced. Are we near the top now?

It's hard to give a Yes or No answer.

Will there be volatility ahead? Most probably yes. Elections, FED, and geo-political tensions are three uncertainties we’ll have to deal with till the end of the year.

Chairman Federal Reserve Jerome Powell spoke today on inflation and rate cuts. He’s not going to cut rates fast. He’s also not going to let the economy suffer the consequences of high interest rates for longer than is necessary.

Basically, he’s telling the market he’s going to take his time. And that’s an approach the market is respecting.

Such a prudent approach is one sign of why the SPY ETF hasn’t peaked yet. There’s room for inflation to go further down. There’s potential for more rate cuts in the future. In short, the positive triggers that can launch the market into a dangerous bull zone haven’t happened yet.

The broader economy isn’t the only thing that can bring SPY down though. There is the matter of the ETF being heavily weighted in tech. Over 32% of the SPY ETF is currently dominated by Information Technology. Here’s a part of the rest of the construction:

• Financials: 12.26%
• Healthcare: 11.83%
• Consumer Discretionary: 9.81%
• Communication Services: 9.2%

The top 10 S&P 500 holdings by weight now contribute roughly 32.5% to the index, a whopping increase from 17.5% in 2015 and exceeding the highest 27% observed in 2000.

This is what Forbes had to say just over a month ago:

The concentration of the top 10 stocks within the S&P 500 index has reached the highest level in decades, stoking fears of overconcentration risks and the necessity for diversification away from these top 10 holdings

Should that worry you? Since 1928, the S&P has returned an average annual return on 9.9%. For many long-term investors, that is good enough. And they aren’t worried about the market top. Also, given its four-star Morningstar rating, acclaimed investor Warren Buffet often advocates for the buying and holding of the ETF.

The dividend yield on the SPY is approximately 1.25% currently, making it a fundamental component of nearly every investor’s stock portfolio.

As per analysts, the mean price target for SPY holdings is $601.13 in the recent three-month period. The highest price target stands at $710.54 against the lowest $489.45, representing an astonishing 10% increase from the current price.

As for quality, the SPY ETF exhibits an exceptionally tight tracking error, standing at a mere -0.03% last month. (A tracking error refers to how closely the ETF’s performance matches that of its benchmark)

One can see a positive growth in the S&P 500’s fair value PE ratio, driven by current monetary policies from FED and other key central banks working towards overseeing surplus debt in the system.

Considering all these factors, investors must anticipate paying higher multiple for the ETF than they historically did.

More By This Author: