Warren Buffett likes index funds — especially those that track the S&P 500.
“In my view, for most people, the best thing to do is to own the S&P 500 index fund,” he once said.
However, this strategy may not be optimal in the current market environment, according to Bank of America’s head of US equity and quantitative strategy, Savita Subramanian.
“The worst thing you can hold is the wholesale S&P 500,” he tells CNBC.
While benchmark tracking has worked well over the past decade, Subramanian points out that the current environment is different.
“The S&P 500 right now is expensive — it’s very crowded. It’s the busiest ticker in the world, if you think about it from an index perspective.”
She still likes Buffett’s long-term approach. But he adds that investors have different time horizons.
“If you have a 10-year time horizon, hold the S&P 500 and watch and wait,” he recommends. “But if you think about what’s going to happen between now and say the next 12 months, I don’t think the bottom is there.”
Of course, that doesn’t mean you have to completely commit to stocks. Here’s a look at what Subramanian likes in today’s market.
While Subramanian doesn’t find the large-cap S&P 500 attractive right now, she sees opportunities in the small-cap space.
“If you think about the small-cap benchmark, it’s pricing in a hard landing, deep, deep recession,” he says.
“We think they will do well. We think we will have a recession, but it will be a softer landing.”
Investors can use ETFs to gain exposure to small-cap companies. Funds like the Vanguard S&P Small-Cap 600 ETF ( VIOO ) and the iShares Russell 2000 ETF ( IWM ) could be a good starting point for further research.
Subramanian has long been bullish on energy.
“I would look for sectors that benefit from a very high inflation environment. I would buy energy,” he says.
While rampant inflation has cast a giant shadow over the stock market, energy stocks have been firing on all cylinders.
In fact, energy was the S&P 500’s best-performing sector in 2021, returning a total of 53% versus the index’s 27% return. And this momentum carried over to 2022.
Year to date, the Energy Select Sector SPDR Fund (XLE) is up 35%, in stark contrast to the broad market’s double-digit decline.
Unlike energy, the industrials sector was not the market’s favorite. But Subramanian sees a revival on the horizon.
“I would buy select industries that could benefit from a CAPEX cycle that we see going on,” he says. “Everyone is moving companies back to the US, it will benefit traditional industrial companies from a more traditional CAPEX cycle instead of spending on technology.”
Sure, Subramanian is talking about “select industries.”
So how do you choose? The key lies in automation.
“I think the best place to be in the industrial complex is some of the automation plays because if you think about it, that’s where companies are spending money.”
Subramanian explains that inflation also occurs in the labor market.
Therefore, as companies bring jobs back to the US, they are “incentivized to automate more of the processes” compared to when they could simply “offshore and pay for extremely cheap labor” in other countries.
Healthcare serves as a classic example of a defensive sector thanks to its lack of correlation with the ups and downs of the economy.
At the same time, the sector offers ample potential for long-term growth due to favorable demographic tailwinds—particularly an aging population—and abundant innovation.
Subramanian finds the field attractive.
“I think health care looks great, it has a lot of free cash flow,” he says.
Average investors may struggle to pick specific healthcare stocks. But healthcare ETFs can provide a diversified way to gain exposure to the space.
The Vanguard Health Care ETF (VHT) offers investors broad exposure to the healthcare sector.
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This article provides information only and should not be construed as advice. Provided without warranty of any kind.