Warren Buffett recommends cheap index funds for most people, but BofA says the S&P 500 is the “worst to hold” right now.  Buy these 4 top sectors to avoid confusion

Warren Buffett recommends cheap index funds for most people, but BofA says the S&P 500 is the “worst to hold” right now. Buy these 4 top sectors to avoid confusion

Warren Buffett recommends cheap index funds for most people, but BofA says the S&P 500 is the

Warren Buffett recommends cheap index funds for most people, but BofA says the S&P 500 is the “worst to hold” right now. Buy these 4 top sectors to avoid confusion

Warren Buffett loves index funds, especially those that track the S&P 500.

“In my opinion, it’s best for most people to own the S&P 500 index fund,” he once said.

Do not miss it

But that strategy may not be optimal in the current market environment, according to Savita Subramanian, Bank of America’s head of US equity and quantitative strategy.

“The worst thing to hold onto is the S&P 500 wholesaler,” she tells CNBC.

While tracking the benchmark has worked well for the past decade, Subramanian points out that the current environment is different.

“The S&P 500 is expensive right now – it’s super busy. It’s the busiest ticker in the world when you think about it from an index perspective.”

She still likes Buffett’s long-term approach. But adds that investors have different time horizons.

“If you have a 10-year time horizon, hold the S&P 500 and watch and wait,” she recommends. “But if you think about what’s going to happen between now and let’s say the next 12 months, I don’t think the bottom has been reached.”

Of course, that doesn’t mean you should completely forgo stocks. Here’s a look at what Subramanian still likes in today’s market.

small caps

While Subramanian doesn’t find the large-cap-focused S&P 500 attractive right now, it sees opportunities in the small-cap space.

“If you think about the small cap benchmark, it’s a hard landing, deep, deep recession pricing in,” she says.

“We think it’s going to be okay. We think we’re going to have a recession, but it’s going to be a softer landing.”

Investors can use ETFs to gain exposure to small-cap companies. Funds such as the Vanguard S&P Small-Cap 600 ETF (VIOO) and the iShares Russell 2000 ETF (IWM) can be a good starting point for further research.

Energy

Subramanian has long been optimistic about energy.

“I would look for sectors that benefit from still very high inflation. I would buy energy,” she says.

While rampant inflation has cast a giant shadow over the stock market, energy stocks are firing on all cylinders.

In fact, energy was the top-performing sector of the S&P 500 in 2021, with returns totaling 53% over the index’s 27% return. And that momentum has continued into 2022.

Year-to-date, the Energy Select Sector SPDR Fund (XLE) is up a solid 35%, in stark contrast to the broad market’s double-digit decline.

‘Select industry’

Unlike energy, the industrial sector has not been a market favorite. But Subramanian sees a revival on the horizon.

“I would buy select industrialists who could benefit from a CAPEX cycle that we see underway,” she says. “Everyone is moving companies back to the US, it will benefit the traditional industrial companies from a more traditional CAPEX cycle rather than spending on technology.”

To be sure, Subramanian is talking about ‘select industrials’.

So how do you choose? The key lies in automation.

“I think the best place to be within the industrial complex is some of the automation games because when you think about it, that’s where companies spend money.”

Subramanian explains that there is also inflation in the labor market.

Therefore, when companies bring jobs back to the US, they are “incentivized to automate more of the processes” compared to when in other countries they just “could go offshore and pay for super cheap labor”.

healthcare

Healthcare is a classic example of a defensive sector due to its lack of correlation with the ups and downs of the economy.

At the same time, the sector offers great long-term growth potential thanks to favorable demographic tailwinds – in particular an aging population – and a lot of innovation.

Subramanian finds the sector attractive.

“I think healthcare looks great. It has a lot of free cash flow revenue,” she says.

Average investors may find it difficult to pick specific healthcare stocks. But healthcare ETFs can offer a diversified way to gain exposure to the space.

Vanguard Health Care ETF (VHT) gives investors broad exposure to the healthcare industry.

What to read?

This article provides information only and should not be construed as advice. It comes without any kind of warranty.

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