SPDR S&P 500 ETF Isn’t the Safe Play That It May Appear to Be

In a column that I wrote a little more than a year ago on the SPDR S&P 500 ETF (NYSE:SPY) stock, I pointed out the risks involved in investing in the ETF, which seeks to emulate the performance of the S&P 500 index.

ETF Investment index funds concept with letter wooden blocks and lots of different currencies, ETFs to buy
Source: Eviart / Shutterstock.com

The index is dominated by several of the world’s largest tech stocks, and in the story I pointed out that those tech stocks were facing tough issues.

I recommended that more conservative investors buy ETFs that focus on fairly conservative sectors like housing, consumer discretionary and travel instead.

I suggested that growth investors buy tech ETFs that emphasize companies in rapidly growing sectors, including robotics, renewable energy, telehealth, financial technology, cybersecurity, and autonomous vehicles.

Some of the sectors that I recommended outperformed the S&P, while others did not. My strategy wasn’t a clear winner versus the S&P. but it wasn’t a clear loser either.

For example, the S&P gained 26.9% in 2021, while a housing ETF jumped nearly 40%, a cybersecurity ETF added just 5%, a fintech ETF  sank 14%, a consumer discretionary ETF rose about 28% last year, and an autonomous driving ETF climbed 15%.

Recently, the point I made back in January 2021 is proving to hold water because the SPY ETF is not doing well at all in the past several weeks.

It looks as if this setback has been driven partly by the mediocre or poor performances of Tesla (NASDAQ:TSLA), Meta (NASDAQ:FB), and Netflix (NASDAQ:NFLX),

In fact, since peaking at around $478 on Jan. 3, the  ETF trades today at $448.

A Closer Look at SPY Stock

Some sector ETFs have done notably better during the same period.

For example, the First Trust Natural Gas ETF (NYSEArca:FCG) climbed about 10%, the Invesco KBW Bank ETF  (NASDAQGM:KBWB) rose about 1.5%, and a Chinese Internet ETF (NYSEArca: KWEB) was little changed.

Making a similar point about the S&P recently was Goldman Sachs analyst Chris Hussey.

“The sharp drop in [Facebook’s] market cap today and the accompanying drag on the S&P500 index is … a stark reminder of the high concentration of mega-cap Tech stocks in the S&P 500 — and the vulnerabilities that such concentration bring,” Hussey wrote on Feb. 3, according to CNBC.

Indeed, even Apple (NASDAQ:AAPL), a name that many consider a pillar of strength for the S&P, hasn’t exactly done great. So far this year AAPL has given dropped more than 5%.

Meanwhile, during the same period, Tesla has tumbled 23%, Netflix more than 31%, and  Meta nearly 30%.

So for those who believe in investing in stocks that have strong momentum and for conservative investors seeking rocks of stability SPY stock doesn’t seem like a wonderful alternative.

All or Nothing Are Not the Only Options

Obviously, when it comes to ETFs, investors can diversify. Those who want to put some of their money into Big Tech, but who also want to limit their exposure to it and to gain exposure to other sectors, can buy multiple ETFs.

For example, an investor could put 50% of the funds that they want to devote to ETFs into SPY stock and 50% into two or three other relatively “hot” ETFs, such as the First Trust Natural Gas ETF and the Invesco KBW Bank ETF.

The Bottom Line on SPY Stock

The S&P 500’s high leverage to several formerly high-flying tech stocks is becoming a big liability for the SPDR S&P 500 ETF.

Now that these Big Tech names have lost the aura of invincibility that they’ve had for most of the last decade, there’s a good chance that at least a few of them will not deliver very good returns going forward.

Consequently, I urge ETF investors to refrain from putting all or even a high percentage of their eggs in the basket of SPY stock.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 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 Ford, solar stocks, Exxon, and Snap. You can reach him on StockTwits at @larryramer.


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