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Stocks Tend to Outperform Bonds but with Greater Risk

Victor Selva

Victor Selva

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Markets opened higher on Tuesday following a crush on Monday that saw all three major indexes put up at least a 2% loss on the day. Wall Street closed Tuesday with gains: The DJIA closed up 0.47% (advanced 72.44 points, at 15445.24), the S&P 500 closed up 0.76% (advanced 13.31 points, at 1755.20) and the Nasdaq Composite closed up 0.86% (moved up 35.12 points to 4032.08).

The SPDR S&P 500 ETF Trust (SPY)

An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours) and investors can sell short. The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Secondly, investors know the composition of the fund at all times. Moreover, as they are a passively managed fund, they have good operating expense ratios.

The SPY ETF is managed by David K. Chin at State Street Bank and Trust Company. It seeks to track the price performance of the underlying holdings in the S&P 500 Index. The S&P 500 Index measures the performance of the large capitalization sector of the U.S. equity market. The Index is a capitalization-weighted index from a broad range of industries chosen for market size, liquidity and industry group representation. The S&P 500 is a popular proxy for the U.S. market and an indicator of the economic health of the U.S. It is best suited for investors looking for diversification across sectors at a low cost.

Top Holding List:

Let's see the fund´s holding list:

•Apple Inc (AAPL) 3.11%

•Exxon Mobil Corp (XOM) 2.54%

•Google Inc (GOOG) 1.83%

•Microsoft Corp (MSFT) 1.78%

•General Electric Co (GE) 1.67%

•Johnson & Johnson (JNJ) 1.64%

•Chevron Corp (CVX) 1.46%

•Procter & Gamble Co (PG) 1.42%

•JPMorgan Chase & Co (JPM) 1.33%

•Wells Fargo & Co (WFC) 1.31%

Total Percentage of Top 10 Holdings: 18.86%

We can see from the list above that those large cap companies offer significant international exposure. Investors looking to complement this fund with smaller-cap stocks might look at Vanguard Extended Market Index ETF.

Recent Opinion

Peter Cardillo, chief economist at Rockwell Global Capital, said last weekend that the New York Stock Exchange is in the middle of a correction, after the S&P 500 lost its support level of 1,775 points. This may cause additional drops of about 5%. In his opinion, the total correction will be between 8% and 10%.

Final Comment

The fund has generated a total return of 17.92% in the last five years, 15.27% in the last three years, and 27.47% in the last year. So for those investors seeking to invest their money in an ETF with exposure to large cap U.S. equities, the SPY ETF is a good option because it offers diversification and has a total return that ranks very high in comparison with peers over the last three years. The SPDR S&P 500 ETF has returned an annual rate of 9.08% since inception.

Hedge fund gurus have also been active in relation to this ETF. Donald Yacktman (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) have invested in it. On the other hand, Joel Greenblatt (Trades, Portfolio), Jim Chanos (Trades, Portfolio), David Tepper (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have reduced their positions.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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