Michael Burry Warns of a 1987-Style Crash. Here Are 2 Index ETFs to Buy Anyway.
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Michael Burry Warns of a 1987-Style Crash. Here Are 2 Index ETFs to Buy Anyway.
09 mins
Investor Michael Burry, who made a name for himself by successfully profiting from the housing market collapse, has been one of the biggest bears when it comes to investing in artificial intelligence (AI) stocks. He holds short positions in several large tech stocks, including chip giant Nvidia, memory maker Micron, AI operating platform Palantir, and Elon Musk’s Tesla. In a bet against the entire AI infrastructure trade, he is also short the iShares Semiconductor ETF.
However, Burry took his negative views to a new level recently, calling for a potential stock market crash reminiscent of the one from 1987. Known as Black Monday, the Dow Jones Industrial Average, which was widely considered the benchmark index at the time, dropped a record 22.6% on Oct. 19, 1987. A combination of a long bull market, rising interest rates, international tension in the Persian Gulf (sounds familiar), the start of computerized trading, and hedging strategies that led to more selling are often cited for the crash.
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In a post on Substack, Burry wrote: “I continue to believe it is possible we are near a major top, and [possibly] a 1987-type fall, but the S&P 500 making new highs likely will bring new money into the market. … Remember, the market going up on falling volatility forces vol-targeting funds to leverage up, and brings leverage from other momentum strategies into play.”
Despite Burry’s success with the housing collapse, a 1987-type crash seems unlikely to happen again. The introduction of circuit breakers, or mandatory trading halts during severe market drops, has helped stem panic selling and prevented a similar crash since. Meanwhile, hyperscalers aren’t slowing down. Rapid payback periods on AI chips and networking hardware, coupled with locked-in customer agreements, continue to justify their aggressive infrastructure spending. At the same time, most AI stocks don’t look expensive.
Against this backdrop, I think the best strategy for the average investor is to stick to dollar-cost average into index exchange-traded funds (ETFs). Consistently buying index ETFs through bull and bear markets has historically proved to be a great wealth-building strategy. One of the big reasons for this is that market-cap-weighted indexes basically deploy a survival of the fittest strategy that lets their winners run and losers fade, which has worked wonders over the long term. Even as AI infrastructure stocks were pulling back earlier this year, the S&P 500 index was still holding strong as new leaders, like Apple, emerged.
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Let’s look at two top index ETFs I’d continue to dollar-cost average into right now.
The Vanguard S&P 500 ETF
Few actively managed funds have been able to consistently beat the S&P 500 Index over the long term. As such, one of the smartest decisions someone can make is to invest alongside the index by dollar-cost averaging into a low-cost ETF such as the Vanguard S&P 500 ETF (NYSEMKT: VOO).
The ETF consists of 500 of the largest U.S. stocks, giving investors an instant portfolio of top companies. The ETF has been a strong performer over the years, generating an average annual return of more than 15% during the past decade. If you were to invest in only one ETF, this is a top choice given its long-term performance and diversity.
The Invesco QQQ Trust
Growth and tech stocks have helped lead the market higher during much of the past two decades, which makes the Invesco QQQ Trust (NASDAQ: QQQ) another great ETF option to dollar-cost average into over the long term. The ETF, which tracks the tech-heavy Nasdaq 100 Index, has consistently outperformed the S&P 500, topping it on a 12-month rolling basis 88% of the time during the past 10 years.
Although not as diversified as the S&P 500, the ETF has been a stellar performer, producing a 20.4% yearly return during the past decade. That’s tough to beat, and with the technological innovation curve steepening, it could continue to outperform during the next decade.
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Geoffrey Seiler has positions in Invesco QQQ Trust and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Micron Technology, Nvidia, Palantir Technologies, Tesla, Vanguard S&P 500 ETF, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
