S&P 500 ETFs Rally To Records

October 31, 2019

[Editor's Note: This story has been updated to reflect the latest performance as of 12:00 p.m. E.T. on Nov. 4]

Record highs are back. The S&P 500 clawed its way to a fresh all-time high this week, bolstered by stronger-than-expected earnings reports and the third Fed rate cut of the year.

The venerable index topped 3,085 for the first time ever on Monday, fueling ETF behemoths like the SPDR S&P 500 ETF Trust (SPY), the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO) to gains of 24.4% for the year.

That puts those ETFs on track for their best year since 2013 (though U.S. stocks did enter 2019 well off their highs, making this year’s gains a bit easier to come by).

Range-Bound Trading

Before this week, the S&P 500 last hit a record high in July, but the pace of the index’s ascent has slowed noticeably since January 2018. That marked the end of a gangbuster tax-cut-fueled rally, after which the S&P 500 was largely range-bound, occasionally eclipsing the 2,873 January 2018 high for brief periods.

 

 

The escalating U.S.-China trade war, global economic slowdown and flattening corporate earnings were blamed for keeping the market in check.

Those concerns certainly haven’t gone away, but they’ve been ameliorated by hopes of a “Phase 1” trade deal with China and recent Fed rate cuts. The S&P 500 currently stands 7.4% above its January 2018 high—11% if you include dividends.

That’s not bad by any means, but certainly less than investors have grown accustomed to during this decade-long bull market.

Small & Midcaps Underperforming

Meanwhile, other indices targeting smaller companies haven’t fared nearly as well as the S&P 500. The small-cap-focused iShares Russell 2000 ETF (IWM) is up 19.7% this year, but still 8.3% below its record high. Likewise, the iShares Core S&P Mid-cap ETF (IJH) is up 21.3% this year, but 2.9% below its all-time high.

 

The underperformance in small and midcaps can largely be explained by earnings. When all is said and done, profits for S&P 500 companies in 2019 are expected to be up marginally compared with last year. The same can’t be said for small caps and midcaps, which, based on current estimates, may end up with earnings declines of 12% and 6%, respectively.

One explanation: Small firms have been less successful in absorbing rising wages and tariff-related price hikes than their larger counterparts.

At the same time, some of the megacaps that dominate the S&P 500, like Amazon, Facebook, Google and Apple, have highly advantageous competitive positions, which enable them to pass on price increases much more easily than smaller companies.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Regardless, if the S&P 500 continues to race higher, small and midcaps would likely tag along for the ride.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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