Despite growing volatility, fear and bearishness, investors should only hold the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) when it comes to exchange-traded funds (ETFs). SPY stock gives investors diversification as well as the right amount of aggressive over-allocation in tech. Near term, the fund’s 28.5% weighting in Information Technology (IT) might hurt performance. But patient long-term investors are now able to take advantage of the current slump by building a bigger position on the dip.
The growth in the technology sector is not going away any time soon. Higher interest rates and high inflation are the only headwinds that hurt this sector’s valuation. Further, investors can remove the risk of timing the market by regularly adding to the S&P 500 ETF.
Here’s what you need to know about SPY moving forward.
Technology Is a Growth Driver for SPY Stock
IT accounts for nearly 29% of SPY stock’s weighting. What’s more, investors skeptical of the technology bubble should know that Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are some of the fund’s top holdings. These three firms have about 7%, 6% and 3.4% weighting, respectively.
For one, Apple is more than just a technology firm. Its operating systems and subscription services may rely on advanced technology. But Apple is selling a suite of consumer products — the iPhone, the iPad and more. What’s more, customers consume various software through the App Store. The company also supplies entertainment via subscription services like Apple Music and Apple TV+.
Next, Microsoft enjoys solid revenue growth from Azure, Office 365 and its data centers. However, its gaming unit is what will really lift growth in the years ahead. Recently, this software giant bet on the metaverse by acquiring Activision Blizzard (NASDAQ:ATVI) for $68.7 billion. Gaming demand will only grow in the next decade and S&P 500 investors will benefit as the trend unfolds.
That finally brings us to Amazon. This company will have frightening valuation multiples, no doubt. Still, AMZN stock accounts for less than 4% of the S&P 500. True, the e-commerce giant lost almost $1,000 per share from its peak in less than three months. But markets will soon realize the panic selling will reverse.
Amazon has and will continue to dominate the online retail landscape. It has expanded into new markets in the last few years, increasing its addressable market. After it acquired Whole Foods in 2017, for instance, it modernized the store’s technology.
That’s not all, though — there are other solid names in the SPY ETF. Take Alphabet (NASDAQ:GOOG) for example. When it comes to Google — a word synonymous with the web — the software giant will only keep growing.
SPY also holds roughly 2% of newly named Meta Platforms (NASDAQ:FB), which gives investors access to the mature social networking sector. Facebook, Instagram and WhatsApp remain dominant sites for users. Meta’s active user growth is immense. Expect any government crackdown on the company’s services to have minimal impact on business. When organizers attempted to boycott Facebook, advertising revenue barely dipped. Within a quarter, the business rebounded.
The Risks
That all said, the S&P 500 does risk an accelerating downtrend in the near term. In particular, the U.S. Federal Reserve has realized it fell behind the inflation curve. Late last year, the Fed reversed its interest rate policy. Instead of planning for one rate hike at 25 basis points, it now expects to raise rates three or four times in 2022.
The Fed should pass a 0.75% to 1.00% interest rate easily. The S&P 500 may fall in response. Fortunately, though, the index’s level is not indicative of the economy. Furthermore, you can expect the Nasdaq to correct more than the S&P 500. Investors stretched valuations. Now, markets must lower expectations for technology firms. Look for the S&P 500 to outperform the Nasdaq in the coming weeks.
Still, the Fed did not count on the Great Resignation movement to tighten employment levels. This created a wage increase that will accelerate inflation. If inflation rates continue at 7% to 10%, the S&P 500 risks correcting further, too.
Fair Value and the Bottom Line on SPY
Investors could refer to the index’s late December 2021 high as a price target. Still, the market is trying to decide if the price-earnings ratio of 25 times is about right. Sentiment is volatile as the market adjusts for interest rate expectations for the next three years.
Index investors should monitor the yields on the short-term one-year and long-term 30-year treasury bond. A rising yield would indicate that markets expect interest rates to rise. As stock valuations fall, the yield may fall, too. When that happens, the market will indicate that the stocks are trading at close to fair value.
Of course, investors can’t predict the fair value of the S&P 500. Instead of emotionally reacting to the volatility, then, consider a dollar-cost averaging (DCA) approach. Plan a regular buying schedule. For example, after every paycheck, set aside a portion of income to buy SPY stock. Growth investors with an aggressive risk tolerance may even want to increase their buying whenever the index happens to fall more. This DCA approach will remove market-timing risks and help keep readers invested in the market.
On the date of publication, Chris Lau did not hold (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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
