3 Ways to Play the S&P 500 Rally with ETFs

RELATED QUOTES

SymbolPriceChange
SPY226.74+0.83
VOO208.13+0.67
IVV228.10+0.75

With nearly 72% of corporate earnings beating estimates and the decision of Republicans to vote on a four-month extension of the debt ceiling, the S&P 500 had no choice but to rally, reaching its highest point in more than five years.  In fact, the Index is just 5.1% lower than the all-time high recorded in Oct 2007.

Last week the S&P 500 rose 0.6% or 8.31 points to break its resistance level at 1,474 only to close at 1,480.9 recording the highest close since Dec 26, 2007. The catalyst behind the rally was positive housing data and a continued drop in the unemployment rate (Housing ETFs Rally on Solid Data).

It appears that 2013 will once again be a good year after 2012 and bring good fortune to U.S. stocks and consequently to the S&P 500 Index. After recording a gain of 13% in 2012, the S&P 500 appears to be well poised to break the 1500 level in 2013 and set even higher highs.

If we compare the gain of S&P 500 in the year-to-date period with the comparable period last year it is almost on par with strong growth. Investors should also note that 93.4% of S&P stocks are trading higher than their 50-day moving average and that all nine industries of the S&P 500 are posting gains (5 Sector ETFs Surging to Start 2013).

Investors should note that it has been 477 calendar days at a stretch that S&P 500 closed without a pullback of 10%. This is the 10th longest rally for S&P without such a major down turn.

It has also been noted that the U.S. equity stocks experienced the healthiest inflow of funds this time since 2000. This indicates that the economy is on the verge of a rebound and investors are gaining confidence in the market (Best and Worst ETFs to Start the Year).

The current market environment entails good investment opportunity for investors if S&P extend its rally going forward. ETFs tracking the Index represent the best way to tap the opportunity and capitalize on recent gains. Below we highlight three ETFs which track this benchmark in low cost and liquid form:

SPDR S&P 500 ETF (SPY)

SPY is the oldest and largest ETF in the U.S. ETF space. It manages an asset base of $125.8 billion and offers immense liquidity as revealed by its trading volume of more than 111 million shares a day. The fund charges a fee of 10 basis points annually.

SPY offers exposure to roughly 500 large cap U.S. equities with a very low concentration in the top ten holdings. The fund just allocates 19% of its asset base in the top ten. Apple, Exxon Mobil and General Electric are the top three holdings in the fund.

SPY has its asset base invested in a diverse group of industries with double-digit allocation starting from Information Technology (18.6%), Financials (15.6%), Health Care (12.18%), Consumer Discretionary (11.61%), Energy (11.1%), Consumer Staples (10.6%) and ending with Industrials (10.2%).

The fund ended the year on 15.8% gain and its year-to-date return stands at 2.1%.

iShares Core S&P 500 ETF (IVV)

In the line-up of ETFs tracking the S&P Index, IVV is the second ETF with the most healthy asset base. The fund manages an asset base of $36.9 billion which it allocates to a basket of 501 securities (The ETF Winners and Losers of October).

The fund’s top three and its concentration in the top ten holdings appear to be same as SPY. Information Technology, Financials and Health Care securities get the top three preferences in the fund with asset allocation of 18.5%, 15.6% and 12.1%, respectively.

The fund gained 15.9% in 2012 and in the year-to-date period it earned 2.2%. The fund charges a fee of seven basis points on an annual basis.

Vanguard S&P 500 ETF (VOO)

Another ETF tracking the S&P 500 Index is VOO. It was launched in Sep 2010 and since then could amass an asset base of $7.2 billion. Its trading volume stands at more than 2 million shares a day.

The fund invests its asset base in 517 holdings with a 21.3% concentration in the top ten holdings. The top three choices of companies are the same as SPY. Among sectors as well, Technology, Financials and Health Care are the top three priorities. However, VOO has an edge in expense charging just five basis points annually from investors.

The fund has delivered a return of 15.92% in 2012. In the year-to-date period, the fund gained 2.2%. (Q4 ETF Asset Report: Broad Market ETFs Reign).

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