With a 4% surge in December, the S&P 500 is on track for a 24% increase for the entire year of 2023. Bloomberg data reveals that ETFs tracking the S&P 500 attracted an impressive capital inflow of $69 billion in December, marking the strongest influx in the past two years.
In the same period, the SPDR S&P 500 ETF Trust (ticker symbol SPY) alone experienced an additional $42 billion inflow. With a total of $494 billion, it stands as the largest ETF fund based on the S&P 500. December 2023 could potentially be the most successful month for this fund since 1998.
The current events once again validate a well-established investment principle that has demonstrated its efficacy numerous times: Investing in the upward trend of the S&P 500.
Art Hogan, the Chief Market Strategist at B. Riley Wealth, commented, “It’s clear that owning a diversified investment portfolio is perhaps the best way to navigate investing, and the best way to do that is to own ETFs tied to the S&P 500. If at the beginning of the year you thought a recession was looming and chose defensively positioned investments, you certainly have been left behind”.
Returning to the beginning of 2023, a pessimistic market outlook was unavoidable, particularly given the impactful Federal Reserve (FED) interest rate hikes that led to a substantial stock market downturn in 2022. However, amidst indications that the U.S. economy could withstand a recession and with a slowdown in inflation, U.S. stocks exhibited consistent growth throughout 2023.
The upward momentum gained further strength in recent weeks following Federal Reserve Chairman Jerome Powell’s statement that the FED had concluded the interest rate hike cycle and might implement three interest rate reductions in the upcoming year.
Consequently, nothing could hinder the influx of funds into S&P 500 ETFs, even when the index saw its most significant single-day decline of the year with a 1.5% drop on December 20. This dip proved insufficient to impede the upward trajectory during the eighth consecutive week of S&P 500 gains, marking the lengthiest winning streak since 2017.
Seema Shah, the Global Chief Strategist at Principal Asset Management, remarked, “The money flow is very resilient but not entirely surprising. As soon as we see any signs that the Fed Chair has slightly shifted his stance on interest rate policy, investors will be very eager to deploy funds”.
Alongside the significant influx of funds into ETFs, the call option volume for these funds has also surged to its highest level in the past 5 years.
David Kudla, founder of Mainstay Capital Management, commented, “Many professional asset managers have lagged behind the market in 2023, so they are trying to seize the opportunity to profit from this recovery”.
Currently, there is a total of $340 billion invested in U.S. equity funds, a figure lower than the $398 billion recorded in 2022. However, four S&P 500 ETFs have attracted over a third of this amount, representing the highest proportion observed thus far. This trend is also impacting ETFs based on specific sector indices, such as energy, which has seen a withdrawal of $12 billion from sector index ETFs this year, marking the worst recorded figure.
On the other hand, ETFs focusing on dividend strategies are experiencing a similar scenario. Not only are these funds less appealing to investors, but their returns are also notably lower compared to the S&P 500. These funds have been a preferred choice for more risk-averse investors.
Art Hogan of B. Riley stated, “You’ll look back on this year and wonder why you bothered investing in specific sectors or dividend investing when simply investing in the S&P 500 would have yielded much better returns”.
According to Bloomberg.
By. Pham Thanh Bien
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