While January's 3.1% inflation was higher than anticipated, it moderated from December's 3.4%. Additionally, the optimistic U.S. economic outlook is reinforced by the resilient labor market and the anticipation of rate cuts this year.
Given the upbeat economic backdrop, two large-cap ETFs, iShares Dow Jones U.S. ETF (IYY) and SPDR S&P 500 ETF Trust (SPY), could be ideal buys for investors seeking exposure to established companies. Let’s understand in detail.
In March 2022, the Federal Reserve kicked off a series of rate hikes to combat soaring inflation. With 11 rate hikes rolled out since then, the central bank has effectively curbed the annual inflation rate, which dropped to 3.1% in January 2024 from a peak of 9.1% in June 2022.
However, with January inflation being hotter than anticipated, economists have adjusted their forecasts, with many now predicting that the Fed's initial rate cut will likely occur later in 2024.
Meanwhile, despite macroeconomic headwinds, the U.S. economy has showcased immense resilience so far. In January, job growth surged, accompanied by the most significant wage increase in nearly two years, underscoring the enduring strength of the labor market.
The latest employment report from the Labor Department highlighted this resilience, with the unemployment rate holding steady at 3.7% last month. Additionally, 2023 witnessed a higher number of job creations than previously estimated, showcasing the economy's robustness and potential for growth.
Moreover, despite treasury yields on the rise, investors are optimistic that the strong U.S. economy and decreasing inflation can buffer stocks from potential downsides. While rising yields typically pose challenges for stocks, some investors believe equities are better equipped to weather this trend, buoyed by the resilient U.S. economy, which has defied expectations amid high-interest rates.
On top of it, investors are finding solace in a robust earnings season, which has surpassed expectations. With reports from approximately two-thirds of companies in, fourth-quarter earnings growth for the S&P 500 is now projected at 9.2%, nearly double, compared to the 4.7% growth forecast at the beginning of January.
In light of these favorable trends, let’s look at the fundamentals of Large Cap Blend ETFs picks, beginning with number two.
ETF #2: iShares Dow Jones U.S. ETF (IYY)
IYY tracks the performance of the Dow Jones U.S. Index. The ETF provides inexpensive, comprehensive exposure to U.S. stocks, encompassing over 1,300 individual holdings spanning all sectors of the U.S. economy and representing companies of various sizes.
With $1.83 billion in net assets of the fund as of February 14, 2024, IYY’s top holding is Microsoft Corporation (MSFT), which has a 6.56% weighting in the fund. It is followed by Apple Inc. (AAPL) at 5.87%, NVIDIA Corporation (NVDA) at 3.87%, and Amazon.com, Inc. (AMZN) at 3.33% weighting. The fund has a total of 1077 holdings.
IYY has an expense ratio of 0.20%, lower than the category average of 0.37%. Its net inflows came in at $11.54 million over the past three months. The ETF’s NAV was $121.98 as of February 14, 2024.
IYY pays a $1.50 annual dividend yielding 1.23% at the prevailing price level. Its four-year average dividend yield is 1.39%. Its dividends have grown at CAGRs of 6.6% and 4.1% over the past three and five years, respectively. The fund has gained 21.7% over the past nine months to close the last trading session at $121.98. It has a beta of 1.01.
IYY’s POWR Ratings reflect this solid outlook. The ETF’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
IYY has an A grade for Buy & Hold and Trade and a B for Peer. In the 280-ETF A-rated Large Cap Blend ETFs group, it is ranked #41. Click here to see all of IYY’s POWR Ratings.
ETF #1: SPDR S&P 500 ETF Trust (SPY)
SPY, which mirrors the S&P 500 Index, is among the largest and most actively traded ETFs worldwide. It provides exposure to a widely recognized equity benchmark, attracting long-term investors interested in large-cap U.S. stocks. Moreover, its frequent trading activity makes it a top choice for active traders.
As of February 14, 2024, SPY has $492.45 billion in Assets Under Management (AUM). It has 503 holdings in total. MSFT has a 7.24% weighting in the fund as its top holding, followed by AAPL and NVDA at 6.60% and 4.28%, respectively. The next in line is AMZN at 3.68%.
The ETF’s net inflows were $27.58 billion over the past year. In addition, its 0.09% expense ratio compares favorably to the 0.59% category average. SPY’s NAV was $498.84 as of February 14, 2024. It has a beta of 1.00.
The ETF pays a $6.63 dividend annually, yielding 1.33% at the current price level. Its four-year average dividend yield stood at 1.52%, and its dividends have grown at a 5.4% CAGR over the past five years. SPY has gained 21.1% over the past nine months, closing the last trading session at $498.57.
It’s no surprise that SPY has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The ETF has an A grade for Buy & Hold and Trade.
Within the same Large Cap Blend ETFs group, it is ranked first out of 280 ETFs. Click here to access all the POWR Ratings for SPY.
What To Do Next?
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SPY shares were trading at $500.44 per share on Thursday afternoon, up $1.87 (+0.38%). Year-to-date, SPY has gained 5.29%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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