As the risks of persistent inflation lingers, the Fed will likely keep interest rates higher for longer. Despite higher interest rates, ongoing inflation pressures, and other macro headwinds, it seems likely that the economy may avoid a recession in the near term, given the robust latest economic data.
Amid an optimistic macroeconomic backdrop, it could be wise to invest in large-cap blend ETFs SPDR S&P 500 ETF Trust (SPY) and Innovator U.S. Equity Power Buffer ETF - April (PAPR) for instant diversification and substantial gains.
In September, the Consumer Price Index (CPI) grew 0.4% for the month and 3.7% from a year earlier, surpassing respective economists’ estimates of 0.3% and 3.6%. While inflation has fallen sharply from its June 2022 peak of 9.1%, it is still well above the Federal Reserve’s long-term target of 2%.
The Federal Open Market Committee (FOMC) agreed to keep the key federal funds rate steady at its range of 5.25%-5.5%, the highest level in 22 years, in its latest meeting on November 1. This marked the second consecutive meeting where the central bank has chosen to maintain the status quo monetary policy.
The U.S. economy appears to stay resilient despite higher interest rates, lingering inflationary pressures, and other domestic and global headwinds. The Commerce Department reported that Gross Domestic Product (GDP) accelerated at a 4.9% annual pace in the third quarter, above the 4.7% estimate.
This strength in the economy was a testament to consumer resilience and a robust labor market; however, it also indicates that after 18 months of steadily rising borrowing costs haven’t cooled the economy the way it was intended. That suggests that the Fed may have to hold rates higher for longer as the threat of persistent inflation lingers.
While the impact of higher interest rates is yet to be felt completely, Bank of America (BofA) analysts say it won’t spark recession when it hits.
“Looking ahead, we expect the economy to slow meaningfully in the coming quarters as higher front-end and long-end rates take their toll on credit conditions. However, we think there is enough momentum in the economy to avoid an outright recession,” they added.
Given the backdrop, investing in large-cap blend ETFs could be wise. Most of these ETFs tend to invest in U.S. industries (with market caps of above $10 billion), and depending on their broad exposure, the portfolios’ return is similar to that of the S&P 500 Index. These ETFs are ideal for conservative investors who only want exposure to the biggest companies in the U.S.
In light of these encouraging trends, let’s look at the fundamentals of these top Large Cap Blend Bonds ETFs picks, beginning with number 3.
ETF #2: SPDR S&P 500 ETF Trust (SPY)
SPY is the best-recognized and oldest U.S.-listed ETF and typically tops rankings for largest AUM and greatest trading volume. The fund tracks a market cap-weighted index of U.S. large- and mid-cap stocks selected by the S&P Committee. SPY may certainly appeal to investors seeking to build a long-term portfolio.
SPY tracks the S&P 500 Index. The fund has assets under management (AUM) of $393.81 billion. It currently has a total of 1000 holdings, with its top 15 assets comprising 49.14% of its AUM.
The fund’s top holdings include Apple Inc. (AAPL) with a 7.19% weighting, Microsoft Corporation (MSFT) at 6.51%, and followed by Amazon.com, Inc. (AMZN) and NVIDIA Corporation (NVDA) with 3.33% and 2.95% weightings, respectively.
SPY has an expense ratio of 0.09%, lower than the category average of 0.37%. Over the past five days, its fund flows came in at $5.36 billion and $1.13 billion over the past month. Also, the ETF has a beta of 1.
The fund pays an annual dividend of $6.51, translating to a 1.54% yield at the prevailing price level. SPY’s dividend payouts have grown at a 4.6% CAGR over the past three years and a 5.4% CAGR over the past five years. The fund’s four-year average yield is 1.54%. Also, its dividend has increased over the 13 consecutive years.
SPY has gained 4.9% over the past six months and 14.9% over the past year to close the last trading session at $430.76. It has a NAV of $430.68 as of November 2, 2023.
SPY’s POWR Ratings reflect this promising outlook. The fund’s overall B rating equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The fund has an A grade for Buy & Hold. Of the 280 ETFs in the B-rated Large Cap Blend Bonds ETFs group, SPY is ranked #43.
To access all SPY’s POWR Ratings, click here.
ETF #1: Innovator U.S. Equity Power Buffer ETF - April (PAPR)
PAPR aims for specific buffered losses and capped gains on the SPDR S&P 500 ETF over a one-year period starting each April. This fund foregoes some upside return and the ETF’s dividend component, as the options are written on the price (not total) return version of the shares. It is actively managed, using FLEX options and collateral exclusively.
PAPR tracks the Cboe S&P 500 15% Buffer Protect April Series Index. With $579.80 million in AUM, the fund’s holdings include OPTIONS with a 99.79% weighting, followed by U.S. Dollar at 0.21%. It has an expense ratio of 0.79% compared to the category average of 0.70%. PAPR fund flows came in at $9.19 million over the past month.
PAPR has gained 4.1% over the past six months and 9.7% year-to-date to close the last trading session at $30.79. In addition, the fund has surged 12.7% over the past year. It has a beta of 0.39. The fund’s NAV was $30.81 as of November 2, 2023.
PAPR’s solid fundamentals are reflected in its POWR Ratings. The fund has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The fund has an A grade for Peer and Buy & Hold and a B for Trade. It is ranked #12 of 280 ETFs in the same group.
Click here to see all the PAPR ratings.
What To Do Next?
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SPY shares were trading at $435.28 per share on Friday afternoon, up $4.52 (+1.05%). Year-to-date, SPY has gained 15.08%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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