Vertigo3d As the S&P 500 continues to achieve new records month over month with expectations that the rally will extend into the second half of 2024, high-risk tolerance investors can generate healthy returns by investing in stocks or ETFs driving the bull run. Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG) and The Technology Select Sector SPDR® Fund ETF (NYSEARCA:XLK) are among the investment vehicles investors can use to make higher returns than the broader market index. Although both ETFs generated nearly double the returns compared to the S&P 500 in the current bull run, I believe moving on with SCHG could help investors achieve higher returns while taking a lower risk compared to XLK. Stock Market Outlook and Tech-Driven Bull Run Despite the Fed’s tightening policy, the US stock market surprised market participants with a sharp bull run, surging from around 3800 points to 5500 points since early 2023. Given half of the returns generated by the magnificent seven in 2023 and 75% year to date, it appears that the S&P 500’s performance and extension of the bull run is likely to be dominated by mega and large-cap tech stocks. Hedge fund managers continue investing heavily in big tech stocks to benefit from the bull run. For instance, one of the world’s largest hedge funds, Bridgewater Associates, significantly increased its stake in Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Microsoft Corporation (MSFT), and other tech stocks in the latest quarter. Last month’s data from Goldman Sachs’ also shows that hedge funds continue betting big on mega-cap tech stocks in the second quarter. I also believe that tech stocks are poised to extend the uptrend because of their robust corporate earnings outlook and increasing demand for AI. For instance, NVIDIA, which dominates the AI-related chip market, generated $26.04 billion in the March quarter revenue, representing a substantial 262% year-over-year increase from the past year period. Its data center revenue grew to $22.5 billion from $18 billion in the previous quarter and $4.2 billion in the year ago period. The company believes it’s just the beginning of a new industrial revolution, which will shift the trillion-dollar traditional data centers into a new type of AI factories, helping companies to significantly improve efficiency and productivity. Similarly, Microsoft’s cloud intelligent division saw 30% revenue growth in the March quarter, with expectations that momentum will continue in the coming quarters due to robust demand for its Azure AI portfolio. According to FactSet data, the information technology sector is likely to generate 19% year-over-year earnings growth in 2024. S&P 500 and information technology sector forward P/E (Yardeni) There is only a valuation-related risk for tech stocks and the S&P 500. This is because the recent run has already pushed the tech sector’s forward price-to-earnings ratio above 30x for the first time in two decades. All of the magnificent stocks are trading above their historical average valuations, leading them to earn poor quant grades from the SA’s quant system. For example, NVIDIA received an F quant grade because it is currently trending around 70x forward GAAP earnings. Similarly, Microsoft, Apple, and Meta Platforms, Inc. (META), Alphabet Inc. (GOOG) (GOOGL), and Tesla, Inc. (TSLA) also received an F grade on the valuation factor. There is no doubt that valuations are high, but I don’t expect a significant price correction because robust corporate earnings performance and AI mania are likely to drive investor sentiment and mitigate concerns over lofty valuations. Market analysts expect the S&P 500 to reach 6000 points in 2024 and 7000 by the end of 2025 from its current 5500 level. XLK Is a Solid Option to Achieve Big Returns XLK price performance (Seeking Alpha) Instead of investing in a single stock, I believe tech ETFs like The Technology Select Sector SPDR® Fund ETF can offer greater exposure to the tech sector while lowering the risks associated with a single stock investment. XLK is one of the best ETFs because it offers exposure to mega and large-cap stocks from the information technology sector and tracks the performance of the information technology select sector index. Its share price rallied 80% since early 2023, beating the broader market gains of nearly 43%. XLK’s portfolio is composed of 68 mega and large-cap stocks from the information technology sector, with the top 10 holdings making up 68% of the overall portfolio. Microsoft and NVIDIA are its two largest stock holdings, collectively representing 43% of the portfolio weight. Apple is also a member of its portfolio while the rest of the top 10 holdings include chip, software and hardware stocks like Broadcom Inc. (AVGO), Advanced Micro Devices, Inc. (AMD), QUALCOMM Incorporated (QCOM), Oracle Corporation (ORCL), Adobe Inc. (ADBE) and Salesforce, Inc. (CRM). Its portfolio components represent nearly 29% of the weight in the S&P 500 index. The ETF currently trades around 29 times earnings and 9.33 times book value while its beta is around 1.19. XLK quant rating (Seeking Alpha) The ETF also earned a strong buy rating based on SA’s quant analysis. It received an A plus score on the momentum factor because shares of the majority of its stock holdings soared sharply in the past months and are currently trading around their all-time highs. Technically, stocks with high momentum scores are likely to perform well in the future. It also received an A score on the expense factor due to its low expense ratio of 0.09. Moreover, an A plus score on the liquidity factor represents higher assets under management and solid trading volume, which is also an indicator of investor confidence in the ETF. On the negative side, the ETF earned a low grade on the risk factor due to a lack of significant diversification. But SCHG Appears the Best SCHG price return Vs XLK and S&P 500 (Seeking Alpha) I believe chasing the bull run with growth investing could be a better option because growth-focused ETFs like SCHG offer greater risk-adjusted returns compared to XLK. This is also reflected in the recent share price performance. SCHG’s share price rallied nearly 20% year to date and 38% in the last twelve months compared to XLK’s 15% and 33%, respectively. The biggest reason for SCHG’s better performance than XLK in the last twelve months was the significant difference in their portfolio structure. SCHG top 10 holdings (Seeking Alpha) I prefer SCHG over XLK because it offers a better portfolio combination with the information technology sector representing almost half of the portfolio. Moreover, key tech stocks, such as Alphabet, Meta and Amazon.com, Inc. (AMZN), are also members of the SCHG portfolio. Consequently, the ETF fully tracks the performance of the magnificent seven. These tech stocks are not available in XLK’s portfolio because the ETF tracks only tech stocks from the information technology sector. I believe holding a position in Meta, Alphabet and Amazon could play a crucial role in improving overall returns because these stocks performed exceptionally in the past quarters due to their strong revenue and earnings growth. For example, Meta’s first quarter revenue grew by 27% year-over-year while its cash position swelled to $58.1 billion. Its share price soared more than 80% in the last twelve months. Besides that, SCHG’s portfolio construction looks better because it does not offer a significant concentration in only a few stocks. Meanwhile, NVIDIA and Microsoft collectively represent nearly 43% of XLK’s portfolio weight. Furthermore, a small percentage of growth stocks from healthcare, financials and industrial sectors broadens its performance and lowers the downside risk. SCHG quant rating (Seeking Alpha) Quant analysis also suggests a strong buy rating for the ETF. It received an A plus score on momentum, liquidity and expenses. Although its dividend grade is lower than XLK, I believe the factor doesn’t matter when chasing returns through aggressive price gains. SCHG’s risk factor, which is crucial for generating high risk-adjusted returns, appears strong compared to XLK. A better grade on the risk factor is attributed to its portfolio diversification and lower concentration on a few stocks. In Conclusion While bull runs create opportunities for investors to make profits, it’s equally crucial to use the right investment vehicle to fully capitalize on the bull run and lower the downside risk. I believe SCHG could be the best option for investors seeking to make big risk-adjusted returns in the current bull run. This is because its portfolio is concentrated on the information technology sector along with other key tech stocks from the communication and consumer cyclical sectors. The ETF also offers a complete coverage of the magnificent seven group while a small exposure to growth stocks from other industries contributes to the uptrend and lowers the downside risk. Its robust share price momentum, high liquidity and low expense ratio also make it a solid ETF to buy and hold in the bull run. Meanwhile, XLK is also a good investment option because it tracks mega and large caps from the information technology sector, which are leading the uptrend. However, its significant concentration in the top two holdings and limited coverage of the magnificent seven group lowers its potential to fully benefit from the tech-driven bull run.
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