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5 Top-Ranked Stocks Driving ETF as S&P 500 Nears New Highs

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After Nasdaq, it’s now the turn of the S&P 500 Index to hit new highs. The benchmark has recovered all the losses made during the pandemic and is just a few points away from February’s all-time high. Notably, it has rallied more than 50% since the March lows (read: S&P 500 Marches Ahead to Set New Highs: ETFs to Tap).  

The bullish trend is likely to continue given the strong fundamentals. This is especially true given a combination of unprecedented levels of fiscal and monetary stimulus, positive developments in coronavirus vaccines, and recovering economic activities. In particular, the latest industry gauge indicates that U.S. manufacturing activity expanded in July at the fastest pace in 15 months. The unemployment rate dropped to 10.2% in July, below June's 11.1% mark.

Additionally, an improving outlook on the COVID-19 case front in the United States coupled with better-than-expected earnings bolstered investors’ confidence. Virus-related hospitalizations in Texas fell to the lowest level since early July on Aug 12, and hospitalizations in California also extended a downward trend. The ascent in stocks came despite the lingering uncertainty over the economic and political outlook.

Further, a rise in mergers and acquisitions and a weak dollar led to a spike in the stock market. The recent dollar weakness is acting as a huge tailwind for the mega-cap companies, which derive most of their revenues from international markets. This is because a weak dollar has made dollar-denominated assets cheap for foreign investors, making U.S. multinationals more competitive and leading to increased profits. As such, companies having a higher percentage of international sales may outperform (read: 4 ETF Zones Making the Most of a Weakening Dollar).

The new executive orders signed by President Donald Trump aimed at extending the coronavirus relief will further act as a catalyst for the stocks.

Against such a backdrop, the proxy version of the S&P 500 Index, SPDR S&P 500 ETF Trust (SPY - Free Report) , has gained nearly 6% in the year-to-date timeframe. Let’s take a closer look at the fundamentals of SPY and its best stocks:

Inside the SPY

The ETF holds 505 stocks in its basket with each accounting for no more than 6.5% of assets. This suggests a nice balance across each security and prevents heavy concentration. The fund is widely spread across sectors with information technology, healthcare, consumer discretionary, communication services and financials holding double-digit allocation each. It has AUM of $296.6 billion and charges 9 bps in fees per year. The product trades in heavy volume of around 72.4 million shares a day on average, ensuring higher liquidity with a tight bid/ask spread, leading to lower trading costs for investors (see: all the Large Cap Blend ETFs here).

SPY has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. Though most stocks in the fund’s portfolio are in the green this year, we have highlighted five that are leading the way in the ETF and have a Zacks Rank #2, suggesting their continued outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here:

Best-Performing Stocks of SPY

PayPal Holdings Inc. (PYPL - Free Report) : It operates as a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. The stock has jumped 78.7% this year and has an estimated earnings growth of 18.7% for the year.

West Pharmaceutical Services Inc. (WST - Free Report) : This global drug delivery technology company applies proprietary materials science, formulation research and manufacturing innovation to advance the quality, therapeutic value, development speed and rapid market availability of pharmaceuticals, biologics, vaccines and consumer healthcare products. The stock has climbed 77.2% and has an estimated earnings growth of 31.8% for this year.

Rollins Inc. (ROL - Free Report) : This company provides pest and termite control services to residential and commercial customers. It has gained 65.2% so far this year and has an estimated earnings growth rate of 6.8% for this year (read: 5 Sector ETFs to Buy at a Bargain Price).

Regeneron Pharmaceuticals Inc. (REGN - Free Report) : The biopharmaceutical company is focused on the discovery, development and commercialization of treatments targeting serious medical conditions. It has gained 62% so far this year and has an estimated earnings growth rate of 14.9%.

Cadence Design Systems Inc. (CDNS - Free Report) : This company provides software, hardware, services, and reusable integrated circuit design blocks worldwide. It has soared 54.5% and has an earnings growth rate of 15.9% for this year.

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