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S&P 500 ETFs & Stocks to Buy on a Likely Great Rotation

Sanghamitra Saha

Wall Street appears to be returning on its normal course as some upbeat earnings reports from Tesla TSLA and Microsoft MSFT as well as a partial trade reprieve are adding to the optimism. The S&P closed above 3,000 on Oct 23, Dow Jones finished above 26,883 and the Nasdaq Composite traded higher to close at 8,119.

Though still not out of woods, the U.S. economy has been showing signs of improvement. The so-called “inverted yield curve,” which gives signals of an impending recession, reverted back to normal on Oct 11, per Reuters. It indicates investors’ high level of confidence in the economy.

Weakness in Q3 GDP May Lead to a More Dovish Fed

The Atlanta Fed’s GDPNow model estimates the U.S. economy expanded 1.8% in the third quarter, down from the second quarter’s growth of 2%. Goldman Sachs also reduced its outlook for Q3 GDP in recent times and quoted the expected figure at 1.7%. The Rapid Update tracker run by CNBC and Moody’s Analytics predicts Q3 growth rate at 1.5%. Softer manufacturing and retail sales data led to such weakness.

But then such weakness led to a dovish Fed. The Fed has already enacted two rate cuts this year and may enact a further cut in October. At the current level, according to CME FedWatch tool, there is a 93.5% chance of a 25-bp rate cut in the Oct 30 meeting.

Why This is the Time for S&P 500 Investing?

If further rate cut happens, incessant cheap money inflows will likely strengthen stocks further. Investors should also note that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies. This should be favorable for stock investing. A partial U.S.-China trade deal could add to the strength to the equity market.

However, in a low-rate environment, investors would be more interested in looking out for securities that ensure regular current income. It is interesting to note that more than half of the S&P 500 companies now yield more than U.S. 10-year treasuries, according to Todd Rosenbluth, the head of ETF and mutual fund research at CFRA. And, yield on the benchmark U.S. treasury was 1.77% on Oct 23 (read: Is 60/40 Rule Dying? Dividend-Heavy ETFs for Retirees).

Time for Great Rotation?

Bonds have seen their share of high this year thanks to growth worries.iShares 20+ Year Treasury Bond ETF TLT offered 15.3% returns against 11% returns offered by the S&P 500. But this could create a bubble in bonds.

Of late,“money is coming out of fixed income investments.” Fund managers may be looking to “rebalance portfolios and position for 2020 by moving money into selected stock sectors,” per Investopedia. And with this we can see the start of the Great Rotation from fixed income into equities.

Even after all kind of headwinds, Vanguard S&P 500 ETF VOO has amassed maximum assets of $12.86 billion so far this year while iShares Core S&P 500 ETF IVV has fetched a sizable $7.23 billion. In comparison, TLT has managed to garner about $5.58 billion in assets.

ETF & Stock Bets

Against this backdrop, we highlight below a few S&P 500 ETFs. Investors can also buy the below-mentioned S&P 500 stocks that are offering yields more than 3%.

ETFs in Focus

Vanguard S&P 500 ETF (VOO)

The underling S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The fund has a Zacks ETF Rank #2 (Buy). It yields 1.98% annually (read: ETF Asset Report of Q3).

SPDR Portfolio S&P 500 High Dividend ETF SPYD

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The Zacks Rank #2 ETF yields 4.39% annually (read: 5 Amazing ETF Strategies for the Fourth Quarter).

iShares Core S&P 500 ETF (IVV)

The S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The Zacks Rank #2 fund yields 2.04% annually.

Stocks in Focus

Macy's Inc. M – Yield 9.52%

Macy’s is one of the leading department store retailers in the United States. This stock has a Zacks Rank #2.

Dominion Energy Inc. D – Yield 4.43%

The company together with its subsidiaries produces and transports energy in the United States. It is a major energy company engaged in regulated and non-regulated electricity distribution, generation and transmission businesses. This Zacks Rank #2 company comes from a top-ranked Zacks industry (top 26%).

Ventas Inc. VTR – Yield 4.40%

This Zacks Rank #2 company is a healthcare real estate investment trust that is mainly engaged in the acquisition and ownership of seniors housing and healthcare properties, and leasing them to unaffiliated tenants or operating them through independent third-party managers. The stock belongs to a top-ranked Zacks industry (top 35%).

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Click to get this free report Dominion Energy Inc. (D) : Free Stock Analysis Report Tesla, Inc. (TSLA) : Free Stock Analysis Report Microsoft Corporation (MSFT) : Free Stock Analysis Report iShares Core S&P 500 ETF (IVV): ETF Research Reports Vanguard S&P 500 ETF (VOO): ETF Research Reports SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports Macy's, Inc. (M) : Free Stock Analysis Report Ventas, Inc. (VTR) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report