Right now looks like a great time to establish a position in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). There are a few things to note about the SPDR S&P 500 ETF Trust right off the bat: First of all, it is the biggest ETF (exchange-traded fund) in the world. Second, SPY stock just suffered one of its biggest losses ever.
While that might sound particularly bad, it isn’t. The ETF tracks the S&P 500 index which recently suffered something of a rout. That sharp decline has many contrarians considering pulling the trigger on the first ETF.
I think that makes a lot of sense.
Rough January Took Its Toll on SPY Stock
The month of January ended as the worst month for the S&P 500 since the beginning of the pandemic. It fell by more than 5% in January, which meant that the SPDR S&P 500 ETF Trust suffered nearly identical losses.
The reason for the losses related to signals from the Federal Reserve that it could aggressively increase interest rates in response to inflation. The Fed hasn’t signaled otherwise with recent suggestions being that it may raise rates at every meeting for the remainder of the year.
As interest rates rise, tech stocks tend to slump. When December’s inflation numbers were released in January it triggered a ripple effect that cascaded through the market. Tech and growth stocks suffered as potential rate hikes mean tightening fiscal policy.
However, the beginning of February hasn’t been as bad for the tech sector. The reason this all matters to SPY stock relates to the allocation of the fund.
Tech Heavy Index
The S&P 500 is heavily represented by tech companies. That, of course, means the SPDR S&P 500 ETF Trust is heavily tech oriented. In fact, it is weighted to include 28.3% tech stocks.
Say what you will about the market and over-reliance on tech, but it really doesn’t matter. SPY has provided 10.6% average annual returns over its life. There are bound to be bumps in the road.
The month of January was one of them. It’s a great chance to pick up SPY stock while it’s still trading lower. However, I can understand that given current volatility, investors might be worried about suffering another decline. One way to hedge against that risk would be to simply invest some percentage of a given total now and the remainder at a later date. In any case, taking the longer view here has shown to be a worthwhile move.
The market has suffered countless ups and down since 1993, the year the SPDR S&P 500 ETF Trust was founded. Remember though, it has provided 10.6% average annual returns in all that time.
I think this is really a case of setting it, and forgetting it.
SPY Stock Represents Market Trust
Any investment in SPY is essentially an investment in the market at large. The ETF’s beta sits exactly at 1.00. That means it rises and falls in lock step with the market. That’s intuitively logical given that SPY is modeled after the S&P 500.
This also means that betting on SPY right now is a bet that the market thinks the S&P 500 isn’t overvalued. SPY stock carries a P/E ratio of 23.1. If the market thinks it’s overvalued it’ll continue to fall. But I don’t think that will happen. The median P/E ratio of the S&P 500 is 14.9 all-time. But 23.1 isn’t high relative to levels over the past 20 years. Buying now makes sense.
ETFs are generally a safe bet. They’re usually not the type of investment that investors lose sleep over. ETFs tend to appreciate slowly over time and bumps in the road are usually relatively minor. That wasn’t the case this time. But SPY stock has shown that it can weather whatever the market throws its way which is why investors should consider it a strong opportunity now.
On the date of publication, Alex Sirois 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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.