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Recovering Economy Drives Bets for S&P 500 ETFs

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The S&P 500 has been flying higher and hitting new highs lately. This is especially true in the backdrop of fast recovering economy supported by continued progress in development of more COVID-19 vaccines, rapid vaccine rollout, reopening of the economy as well as new $1.9 trillion stimulus (read: 10 Sector ETFs Flying Higher on a Recovering Economy).

The combination of these factors has led to higher demand for all types of products and services in the economy. In particular, Americans will spend on big-ticket items such as vacations and weddings, companies will go on hiring sprees, and the transition to new technologies such as electric vehicles will accelerate. Additionally, signs of a healing labor market and upbeat earnings with rising earnings estimates for the next quarters bode well for economic growth.

Many analysts are bullish on the economy given the encouraging developments coupled with a new stimulus package. Jefferies expects GDP growth of 9.5% in the first quarter and nearly 7% for this year while Goldman foresees the economy to grow 5.5% in the first quarter and then accelerate to 11% in the second. New York Federal Reserve President John Williams projects GDP growth to be the strongest this year in decades with strong federal fiscal support and continued progress on vaccination.

When the economy improves, the stock market sees a boom. According to the Reuters poll last month, the S&P 500 Index will likely reach 4,000 by the end of this year. Many Wall Street strategists raised their target price on the S&P 500 with Credit Suisse lifting the target price from 4,200 to $4,300 by the end of the year.

However, the recent technology sector sell-off seems to be somewhat affecting the S&P 500 as yields are on surge. Higher rates tend to hit hard the technology sector as it relies on easy borrowing for superior growth. The value of the tech stocks depends heavily on future earnings, and as long-term yields rise, it lowers the present value of companies’ future earnings (read: Bet on Cash-Rich Tech ETFs & Stay Away From the Rout).

How to Play?

Amid the recovering economy, investors seeking to participate in the S&P 500 Index’s rally can consider ETFs that replicate the index. While these funds look similar in terms of the holdings breakdown with Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) taking the top two spots and having a Zacks ETF Rank #3 (Hold), there are few key differences between them. We have highlighted the differences below:

SPDR S&P 500 ETF Trust (SPY - Free Report)

Launched in January 1993, SPY is the ultra-popular and the oldest U.S. equity ETF with AUM of $332.7 billion. It is the most actively traded fund with average daily volume of around 69.7 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.

iShares Core S&P 500 ETF (IVV - Free Report)

With AUM of $254.3 billion, IVV is a lot smaller than SPY and less liquid, trading in average daily volume of 3.8 million. This ensures some additional cost in the form of a marginal bid/ask spread. The fund is the low-cost choice in the space, charging just 3 basis points (bps) in annual fees, 6 bps less than the State Street product. Additionally, the product can lend out shares to earn extra and reinvests dividends in the index until paid out quarterly (read: 6 Red-Hot ETFs of February).

Vanguard S&P 500 ETF (VOO - Free Report)

Though it has a similar structure and expense ratio as that of the iShares product, average daily volume is relatively similar at 3.6 million shares. VOO has amassed $198.9 billion in its asset base.

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 (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 (see: all the Leveraged Equity ETFs here).

ProShares Ultra S&P500 ETF (SSO - Free Report)

This is the most popular and liquid ETF in the leveraged space with AUM of $3.1 billion and average daily volume of more than 2 million shares. The fund seeks to deliver 2X the return of the index, charging investors 91 bps in fees per year.

Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report)

While this product also provides 2X exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $26.5 million in AUM and sees lower volume of about 17,000 shares a day on average.

ProShares UltraPro S&P500 ETF (UPRO - Free Report)

This fund provides 3X exposure to the index with a higher expense ratio of 0.93%. Average trading volume is solid, exchanging about 4.8 million shares per day on average. It has amassed $1.9 billion in its asset base (read: $1.9-T Stimulus to Boost U.S. Equity Demand? ETFs to Gain).

Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report)

Like UPRO, this fund also creates 3X long position in the S&P 500 Index with 0.95% in expense ratio. It has AUM of $1.7 billion and liquid and trades in average daily volume of nearly 6.3 million shares.

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