S&P 500 ETF TrustNYSE American: SPY

Despite the underperformance of several sectors, the SPDR S&P 500 ETF Trust SPY has already exceeded its average annual return in just over six months. Amid unprecedented gains by big tech companies, how much can the S&P 500's performance be attributed to the dominance of just a few companies?

I believe the growth potential of SPY is actually capped, and investors should underweight it, not only relative to other geo markets but also to other asset classes. Despite record capital inflows into S&P 500 ETFs, indicators like ERP suggest owning SPY may be less attractive than bonds.

SPY is very expensive by usual valuation metrics such as P/E, dividend yield, and PEG ratio. Yet, the truly alarming sign comes when its valuation is benchmarked by risk-free rates. With the excess CAPE Yield (“ECY”) hovering at a historical low (only about 1.2% currently), history suggests extremely unfavorable excess return potential over treasury bonds.

Proprietary Vanguard data suggest that the overall U.S. hires rate is trending higher. Even as demand for middle- and top-income earners continues to soften, hiring activity for workers earning less than $55,000 remains elevated compared with 2019 levels, leading to better employment opportunities and solid inflation-adjusted wage growth for that group.

The search for better retirement income solutions has led to the emergence of target-date funds (TDFs) with an annuity component. “Our researchOpens in a new tab finds that this innovative strategy shows investment merit for certain investors,” said Roger Aliaga-Díaz, Ph.D.

On this week's episode of ETF Prime, VettaFi Editor-In-Chief Lara Crigger joined host Nate Geraci to discuss ETF flows, spot ether ETFs, and the prospective Texas Stock Exchange.

Cap-weighted S&P 500 index fund is not ideal for long-term investors seeking diversification due to concentration risk. Holding SPY ensures market returns, but sacrifices the potential for outperformance. Cap-weighting leads to concentration risk and may not accurately reflect the size and value of companies.

The S&P 500 is moderately overvalued with a P/E ratio above its historic mean, but it reached a new all-time high. The CBOE Volatility Index (VIX) is below 13, indicating low volatility in the market. Days with both an all-time high for the S&P 500 and a VIX below 13 were historically followed by a lower than average three-month performance.

The S&P 500 had its best month since February, having risen 4.3% in May. While many stocks have powered the ETF, we have highlighted five that have gained in double-digits and have solid Zacks.