With the S&P 500 now dominated by several of the world’s largest tech stocks, I’m not enamored with the SPDR S&P 500 ETF (NYSE:SPY). Since most of those large tech stocks are facing meaningful problems, while the S&P has largely become a strange synthesis of those few tech stocks and “the real economy,” I think most investors should choose other ETFs.
I’m not saying that SPY stock will do badly this year, Indeed, I believe that, as long as the Washington Democrats don’t hike taxes excessively, impose too many new regulations, or get Wall Street very worried about the national debt, the economy should do fairly well in 2021.
The second half of the year, which will likely feature huge, pent-up consumer demand as the novel coronavirus pandemic ends, should be particularly strong. In that environment, SPDR S&P 500 will more than likely climb meaningfully. But both conservative and growth-oriented investors have much better choices.
Better Choices for Conservative Investors
Six Big Tech stocks now account for almost 25% of the S&P 500. Those six tech stocks are Apple (NASDAQ: ), Microsoft (NASDAQ: ), Amazon (NASDAQ: ), Alphabet (NASDAQ:GOOG,NASDAQ: ), Facebook (NASDAQ: ) and Tesla (NASDAQ:TSLA).
In my opinion, the generally weak growth of iPhone demand and Tesla’s huge valuation make Apple and Tesla quite risky. Facebook is facing intense legal and political problems, as well as growing competition from Snap (NYSE:SNAP).
I have a feeling that the Biden administration will be anxious to curry favor with Amazon CEO Jeff Bezos, the world’s richest person who owns the Washington Post and could soon buy other media properties. As a result, I expect the administration to favor Amazon’s cloud business over Microsoft’s. That, of course, won’t be favorable for Microsoft stock.
I’m relatively upbeat on Amazon stock, but the e-commerce giant’s results could slump after the pandemic ends. As for Google, I think it has a bright future, but it’s also facing more than its share of legal difficulties. And like Amazon, Apple and Microsoft could very well be hurt by the easing of the work-from-home trend in 2021.
Given the high weight of fairly risky tech stocks in the S&P, SPY stock doesn’t seem optimal for risk-averse investors. Instead, for such investors, I recommend ETFs that focus on fairly conservative sectors likely to do well this year. Among those in the latter category are housing, consumer discretionary, and perhaps even travel.
SPY Stock Isn’t Great for Growth Investors
Since the Big Tech stocks have high valuations and the problems I described, they aren’t likely to jump hugely in 2021. Moreover, the S&P has its fair share of sectors, including banking and consumer staples, that are very unlikely to generate strong growth this year.
So for growth investors, I’d recommend tech ETFs that emphasize companies in rapidly growing sectors, including robotics, renewable energy, telehealth, financial technology, cybersecurity, and autonomous vehicles. Because I think e-commerce will hit a lull later this year, I’d stay away from ETFs which emphasize that sector for now.
The Bottom Line on SPY
I suppose SPY could be a good choice for investors who are both enamored with the Big Six Tech Stocks and want exposure to the entire economy. But for more conservative investors, I think that focusing on the sectors of the economy that are both solid and likely to outperform in 2021 makes much more sense.
And for growth investors, it’s logical to buy ETFs that focus on the tech sectors which are growing the fastest. That strategy should produce much higher returns than buying the SPDR S&P 500 ETF.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.