Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Why You Should Run Away from SPY, IVV, VOO, and Other S&P 500 ETFs

Stock-Markets / Stock Markets 2018 Jan 03, 2018 - 08:02 AM GMT

By: John_Mauldin

Stock-Markets

BY OLIVIER GARRET : A decade after the Global Financial Crisis, investors seem to have forgotten about risk.

The amount of money that has flowed into S&P 500 ETFs in recent years concerns me. With little regard for valuation, investors just continue to pump capital into ETFs that track the main index.

Over the last three years, $100 billion has flowed into the three largest S&P 500 ETFs—SPY, IVV, and VOO. This year alone, investors have pumped in around $50 billion.


That’s a staggering amount of capital at a time when the market looks overpriced and ready for a pullback.

If you’re invested in an S&P 500 ETF, it’s time to be careful. Contrary to popular belief, these broad ETFs provide minimal diversification.

At the same time, they expose investors to some of the most overvalued stocks in the world. (Learn more in an exclusive ETF report from former ETF Head at Lehmah Brothers Jared Dillian, which you can download here.)

Here’s why.

Overexposure to FAANG and Other Insanely Valued Stocks

The S&P 500 has risen in a straight line in 2017.

With record low levels of volatility, the index has returned nearly 20% this year. This rise has pushed the market’s valuation up to dangerously high levels.

Yet it’s not just the overall valuation of the index that looks too high. It’s the eye-watering valuations of some of the largest stocks within the index.

Look at the FAANGs, for example.

These stocks have rallied hard in 2017, and several now trade at insane valuations.

Amazon has a P/E ratio of 300. Netflix trades on 190. Facebook and Google trade at P/E ratios of around 35. The FAANGs are priced for perfection right now. These valuations leave little margin for error.

Even worse, the FAANGs make up an increasingly large part of the index. Over the course of 2017, the index weight of these five stocks has increased from under 9%, to almost 11%.

While you would think that a 500-stock index would be well diversified, a closer analysis of the S&P 500 reveals an alarming picture.

Apple has a near 4% weight within the index. Google contributes almost 3%. Amazon and Facebook combine for another 4%. In total, the five FAANG companies make up around 11% of the index alone.

But it gets worse.

The index is also heavily skewed to the technology sector. Five of the top 10 holdings are tech stocks.

Adding to the weights of the FAANGs in the top 25 holdings are stocks such as Microsoft (2.9%), Intel (0.9%), and Cisco Systems (0.8%).

All up, the technology sector amounts to close to a quarter of the index. That’s up from 18% just four years ago.

At the peak of the dot-com bubble, the tech sector had a weighting of almost 35%. It fell to around 13% in the crash.  

The composition of the index means that investors have the highest exposure to a sector that offers minimal upside right now.

Diversification Myth

While you may believe that a 500-stock index would provide strong diversification benefits, the chances are, you’re not as diversified as you think you are.

That’s because every investor owns the same basket of stocks.

Investors have neglected company fundamentals, and instead poured billions into stocks as a whole. Stocks have become a singular entity. Investors did the same thing to commodities a decade ago and look what happened there.

In a market pullback, investors will all be selling the same basket of stocks. The equity index flows will reverse.

Investors will realize they’re not diversified, after all. It could get ugly.

Growth vs. Value Gap

Also remember that S&P 500 trackers, by definition, ignore valuations and fundamentals.

So while an index tracker will get you exposure to a handful of attractively valued, world-class stocks, it will also buy you plenty of exposure to overpriced stocks.

According to UK investment house Woodford Investment Management, the difference between the performance of value stocks and growth stocks across the US market today is “greater than at any stage in stock history.


Source: Woodford Funds

Portfolio manager Neil Woodford, one of the UK’s most celebrated investors, recently warned, “there are so many lights flashing red that I am losing count.”

Given his track record of successfully avoiding the dot-com boom and also avoiding bank stocks before the Global Financial Crisis, investors should take note.

To give you a more specific example, look at Twitter. The company has recorded three straight quarters of year-on-year revenue declines. It continues to generate losses. Yet its share price is up 45% this year.

In the current environment, when the performance differential gap between value and growth stocks is extreme, indexing is a very dangerous strategy

It’s for this reason that many professional investors are now hitting the sell button.

Looking at Wall Street SEC filings, large money managers such as UBS and Wells Fargo are dumping S&P 500 trackers. Recent filings show that SPY is one of the most sold stocks by investors managing more than $100 million.

If the smart money is dumping the index, shouldn’t you join them?

Unknown Territory

Lastly, be aware that, because ETFs are a relatively new investment vehicle, their liquidity is yet to be tested in a major bear market.

The S&P 500 tracker inflows in recent years, while large, have been orderly. But what happens in the event of a major market reversal? What if investors all want their capital back at once? Will the outflows be as orderly?

That remains to be seen.

Free Report: 5 Key ETF Trading Strategies Every Investor Should Know About

From Jared Dillian, former head of ETF trading at Lehman Brothers and renowned contrarian analyst, comes this exclusive special report. If you’re invested in ETFs, or thinking about taking the plunge into the investment vehicle everyone’s talking about, then this report is a clever—and necessary—first step. Get it now.

John Mauldin Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules