Warren Buffett recommends low-cost index funds for most people – but BofA says the S&P 500 is the ‘worst thing to hold’ right now.  Buy these 4 main sectors to avoid confusion

Warren Buffett recommends low-cost index funds for most people – but BofA says the S&P 500 is the ‘worst thing to hold’ right now. Buy these 4 main sectors to avoid confusion

Warren Buffett recommends low-cost index funds for most people - but BofA says the S&P 500 is the 'worst thing to hold' right now.  Buy these 4 main sectors to avoid confusion

Warren Buffett recommends low-cost index funds for most people – but BofA says the S&P 500 is the ‘worst thing to hold’ right now. Buy these 4 main sectors to avoid confusion

Warren Buffett likes index funds – especially those that follow the S&P 500.

“In my opinion, for most people, the best thing to do is own the S&P 500 index fund,” he once said.

Don’t lose

But that 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 to hold is the wholesale S&P 500,” she tells CNBC.

While the benchmark index has performed well over the past decade, Subramanian points out that the current environment is different.

“The S&P 500 is expensive right now — it’s very crowded. It’s the most crowded ticket in the world if you think about it in terms of the index.”

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,” she advises. “But if you’re thinking about what’s going to happen between now and say the next 12 months, I don’t think that’s the bottom line.”

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

Small caps

While the large-cap-focused S&P 500 isn’t attractive right now, she sees opportunity in the small-cap space.

“If you think about the small-cap benchmark, it’s been priced into a hard landing, a deep, deep recession,” she says.

“We think they’ll be fine. We think we will bounce back, but it will 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) may provide a good starting point for further research.

Energy

Subramanian has long been an advocate of energy.

“I want to look for sectors that benefit from an inflationary background that is still very high. I would buy energy,” she says.

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

In fact, energy was the best performing sector in the S&P 500 in 2021, gaining a total of 53% compared to the index’s 27% return. And that momentum has carried into 2022.

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

‘Select industries’

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

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

To be sure, Subramanian is talking about “select industries.”

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

“I think the best place to be within 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 is also happening in the labor market.

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

Health care

Health care is a classic example of a defense sector due to its lack of correlation with economic progress.

At the same time, the sector offers plenty of long-term growth potential due to favorable demographic tailwinds — especially an aging population — and plenty of innovation.

The sector is attractive to Subramanian.

“I think health care looks great, it’s got a lot of free cash flow returns,” she says.

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

Vanguard Health Care ETF (VHT) gives investors broad exposure to the health care sector.

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

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