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S&P 500 Hits 2,500 Mark: How to Trade With ETFs

Mutual Fund Report for TRMCX

Fears over Hurricane Irma and North Korea have abated and the bull market remains intact with the S&P 500 Index reaching another milestone of topping 2,500 for the first time. This represents the second-longest bull run in U.S. history, having added almost $20 trillion to the value of American equities and overtaken the 266% climb during the 1949-56 run, per Bloomberg.

The major milestone came in less than four months after the S&P 500 breached 2,400 amid concerns over elevated valuations and Washington turmoil. With this, the S&P 500 gained nearly 12%.

Inside The Surge

Investors’ shifted their focus to steady economic fundamentals and strong corporate earnings. The economy has been on the growth path courtesy of an impressive labor market, increase in wages, higher consumer spending and high consumer confidence. Notably, U.S. GDP expanded 3% year over year in the second quarter, from the previous reading of 2.6%, and represented the fastest pace in more than two years. Consumers also appear more optimistic about the Consumer Confidence Index, as indicated by the Conference Board, as it surged to the second-highest level since late 2000 in August.

According to the Earnings Trends, total earnings for the S&P 500 Index is on an uptrend with expected growth of 7.5% for this year and 11% for the next from 0.7% growth recorded last year. Additionally, Trump’s indications of a tax reform brought back the risk appetite (read: Bet on These ETFs on New Hopes for Tax Reform).  

Against such a bullish backdrop, investors’ seeking to participate in the S&P 500 Index rally could consider ETFs that replicate the index. While these funds look similar in terms of the holdings breakdown, with Apple AAPL and Microsoft MSFT taking the top two spots, there are few key differences between them. We have highlighted and spot the differences between them below:

SPDR S&P 500 ETF Trust SPY

Launched in January 1993, SPY is the ultra-popular and the oldest U.S. equity ETF with AUM of $245.8 billion. It is the most actively traded fund with average daily volume of around 70.1 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. With this drawback, SPY is leading the ETF redemptions list this year with nearly $4.5 billion in outflows and has gained 12.5% so far this year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETF Industry to Face Regulatory Oversight?).

iShares Core S&P 500 ETF IVV

With AUM of $126.7 billion, IVV is a lot smaller than SPY and less liquid, trading in average daily volume of 3.4 billion. This ensures some additional cost in the form of a marginal bid/ask spread. However, the ETF is the top asset creator this year, having accumulated nearly $24.1 billion. Additionally, it is the low-cost choice in the space, charging just 4 bps in annual fees, less than half of the State Street product. Additionally, the product can lend out shares to earn extra and reinvests dividends in the index until paid out quarterly. This is likely to lead to 50 bps higher returns than SPY this year. IVV has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: S&P 500 ETFs Face Off: SPY Versus IVV).

Vanguard S&P 500 ETF VOO

This ETF also topped the top-10 asset flow creation list with inflows of about $9 billion. Though it has a similar structure and expense ratio as that of the iShares product, average daily volume is relatively low at 1.9 million shares, pushing the bid/ask spread a little higher. VOO is up 13.1% this year and has a Zacks ETF Rank #2 with a Medium risk outlook.

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 (1.25x, 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.

Direxion Daily S&P 500 Bull 1.25x Shares LLSP

This ETF offers 1.25X exposure to the index and is the cheapest choice in the large-cap leveraged space, charging just 35 bps in annual fees. It has accumulated $8.3 million in its asset base while trades in a smaller volume of 3,000 shares a day on average. The product has added 15.8% so far this year.

ProShares Ultra S&P500 ETF SSO

This is the most popular and liquid ETF in the leveraged space with AUM of $1.9 billion and average daily volume of around 1.7 million shares. The fund seeks to deliver 2x the return of the index, charging investors 0.89% in expense ratio. It has gained 25.5% this year.

Direxion Daily S&P 500 Bull 2x Shares SPUU

While this product also provides 2x exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $3.6 million in AUM and sees lower volume of about 2,000 shares a day on average. Additionally, SPUU has returned 880 bps lower than SSO this year (see: all the Leveraged Equity ETFs here).

ProShares UltraPro S&P500 ETF UPRO

This fund provides 3x exposure to the index with a higher expense ratio of 0.94%. Average trading volume is solid, exchanging more than 1.4 million shares per day on average. It has amassed $907.5 million in its asset base and is up 39.5% so far this year.

Direxion Daily S&P 500 Bull 3x Shares SPXL

Like UPRO, this fund also creates 3x long position in the S&P 500 Index while charges one basis point extra in fees a year. It is less popular with AUM of $579.9 million but slightly more liquid with average daily volume of nearly 1.8 million shares. SPXL has gained 38.9% so far this year.

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Apple Inc. (AAPL) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
SPDR-SP 500 TR (SPY): ETF Research Reports
DIRX-LC BULL 3X (SPXL): ETF Research Reports
PRO-ULTR S&P500 (SSO): ETF Research Reports
PRO-ULT S&P500 (UPRO): ETF Research Reports
DIR-D SP5 2X BL (SPUU): ETF Research Reports
VANGD-SP5 ETF (VOO): ETF Research Reports
ISHARS-SP500 (IVV): ETF Research Reports
DIRX-D SP5 B125 (LLSP): ETF Research Reports
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