Investors seemed to grow optimistic about business prospects as encouraging economic data were released along with notable progress in the coronavirus vaccine front. In fact, last month marked the best August for Dow and the S&P 500 since 1984 and 1986, respectively. Notably, reports of a spike in new coronavirus cases across the United States seemed to subside a bit, buoying investors’ enthusiasm.
Amid the positive vaccine development, improving U.S. economic outlook and market optimism, Wall Street suffered its worst day in almost three months on Sep 3, especially driven by the sharp sell-off in technology stocks. People rushed to book profits, may be due to worries over lofty valuations, uncertainty over another pandemic stimulus-relief package, budget negotiations and the approaching elections. However, September is historically the worst month for the stock market. Per the LPL Financial data in a Yahoo Finance article, the S&P 500 has fallen about 1% on average in September since 1950.
Against this backdrop, let’s look at some ETF areas one can consider investing in for a smooth sail amid the turbulences September can usher in:
Dividend-focused products offer safety in the form of payouts while at the same time providing stability as mature companies are less volatile to large swings in stock prices. Dividend-paying securities are the major source of consistent income for investors to create wealth when returns from the equity market are at risk. This is because the companies that pay out dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
Thus, if September continues to be a dull trading season, investors will like to guard their portfolios by picking dividend-focused products. Moreover, with elections approaching, investors need to prepare for heightened volatility in the broader equities space. Also, it is being believed that the earnings results in the third and fourth quarter of the ongoing year might not be as well as the second quarter as most analysts are done with adjusting estimates. In such a scenario, investors can consider
Vanguard Dividend Appreciation ETF ( VIG Quick Quote VIG - Free Report) , Vanguard High Dividend Yield ETF ( VYM Quick Quote VYM - Free Report) , SPDR Portfolio S&P 500 High Dividend ETF (SPYD), iShares Core Dividend Growth ETF (DGRO) and (HDV) (read: iShares Core High Dividend ETF Here's Why Dividend Growth ETFs Look Appealing Now ). Cyclical Sector ETFs
Bulls can ride the wave of favorable stocks in the cyclical sectors like industrial, financial, energy and consumer discretionary. Notably, stocks within the cyclical sectors mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors automatically perform well.
The reopening of the U.S. states definitely comes as a ray of hope for players in the consumer discretionary sector, which attracts a major portion of consumer spending. Also, the ramp-up in economic activities can offset this downside for the banking sector. Also, with support from the central bank and hopes of a further stimulus by the Congress, banks are expected to fare well in the near term.
The industrial sector, which took a hit from the disruption of global supply chains and the closedown of factories, is expected to rebound as the economy reopens. Moreover, the third quarter began with an improving trend in manufacturing activity in the United States.
Although election uncertainty and the historically weak month continue to dent sentiments, risk-tolerant long-term investors could continue to invest in cyclical ETFs provided they have the patience for extreme volatility given the twin tailwind of a potential vaccine and massive stimulus.
Against this backdrop, we highlight a few ETF areas where money could be parked in for safety as these are emerging as the new leaders:
Consumer Discretionary Select Sector SPDR Fund ( XLY Quick Quote XLY - Free Report) , Vanguard Consumer Discretionary ETF ( VCR Quick Quote VCR - Free Report) , Invesco KBW Bank ETF (KBWB), SPDR S&P Regional Banking ETF ( KRE Quick Quote KRE - Free Report) , The Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF ( VIS Quick Quote VIS - Free Report) (read: Don't Fear Correction: ETF Laggards Are Emerging Leaders). Biotech ETFs
The race to introduce a vaccine and treatment for coronavirus is opening up opportunities, making the biotech sector a prospective space for investments. According to WHO, around 170 coronavirus vaccines are in development globally, with 33 candidates reaching the clinical trials (per The Wall Street Journal article). Taking hopes higher, AstraZeneca plc (AZN) recently announced the beginning of a late-stage study in the United States on its coronavirus vaccine candidate, AZD1222, which it is developing in partnership with Oxford University.
Moving ahead, Moderna (MRNA), which is developing this vaccine in collaboration with the National Institute of Allergy and Infectious Diseases, has begun the Phase 3 clinical trial, encompassing 30,000 healthy participants at around 100 research sites in the United States. Pfizer (PFE) in collaboration with German biotech firm BioNTech has also started its late-stage study on a coronavirus vaccine. The trial comprises around 30,000 participants and will be conducted at nearly 120 sites globally.
Notably, ETFs with considerable exposure to the biotech space are
iShares Nasdaq Biotechnology ETF ( IBB Quick Quote IBB - Free Report) , SPDR S&P Biotech ETF ( XBI Quick Quote XBI - Free Report) and VanEck Vectors Biotech ETF (BBH) (read: Biotech ETFs to Shine Bright on Coronavirus Vaccine Progress). Inverse ETFs
The virus-induced volatility is boosting demand for inverse or inverse-leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can earn higher returns in a shorter period of time, provided the trend remains favorable. However, these funds run the risk of huge losses compared with traditional funds in fluctuating markets. So, investors intending to play against the tumbling Dow Jones may tap
ProShares Short Dow30 ( DOG Quick Quote DOG - Free Report) , ProShares UltraShort Dow30 ( DXD Quick Quote DXD - Free Report) and ProShares UltraPro Short Dow30 (SDOW) (read: ETF Strategies to Brave the Second Wave of Coronavirus Infections). Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.
Get it free >>