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Vaccine Hopes & Divided Government: Sector ETFs to Win

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Wall Street has been charged up since election. Now, the Nov 9 news that a Pfizer (PFE - Free Report) and BioNTech (BNTX - Free Report) vaccine candidate was more than 90% effective in avoiding COVID-19 in its clinical trial has instilled more optimism in the markets.

In a nutshell, the global markets have been riding higher lately on dual tailwinds of hopes for a divided U.S. congress (which indicates the likely reiteration of the existing policies) and vaccine optimism (which indicates a return to economic normalcy).

A divided congress or balanced government means status quo, “which prevents big changes to health care and the tax code," said Darrell Cronk, president of Wells Fargo Investment Institute, as quoted on nbcnews.com. Some of Biden’s proposed policies (like tax hike) may not see an easy passage due to gridlock.

On the other hand, the vaccine news will now turn the coronavirus laggards into the real leaders. SPDR S&P 500 ETF Trust (SPY), SPDR Dow Jones Industrial Average ETF Trust (DIA) and iShares Russell 2000 ETF (IWM) added 1.27%, 3.01%, 3.71%, respectively, while the tech-heavy virus winner Invesco QQQ Trust (QQQ) lost about 2.04% on the day.

Against this backdrop, below we highlight a few sector ETFs that could gain ahead on the double tailwinds.

Biotech & Healthcare

This space is a clear beneficiary of the dual factors. While the vaccine news is a positive for the pharma space, the likelihood of a divided Congress would benefit drugmakers and health insurers.

“Even though drug pricing and reimbursement reform have seen support from both Democrats and Republicans, we expect the Senate’s filibuster-proof, 60-vote supermajority requirement to pass major legislation will shield the biopharma industry from the most controversial reforms,” SVB Leerink Geoffrey Porges told clients in a research note, reports Bloomberg, as quoted on Aljazeera.com.

iShares U.S. Healthcare Providers ETF (IHF - Free Report) and Invesco Dynamic Pharmaceuticals ETF (PJP - Free Report) may continue their winning run (read: Here's Why Healthcare ETFs Are Rallying Post Elections).

Energy

The coronavirus-led global slowdown crippled oil demand. Due to the second wave of the virus attack, major parts of Europe like Germany, France and the U.K. are under lockdown now. Citi recently slashed its 2021 Brent and West Texas Intermediate crude price outlook by $5 to $54 and $49, respectively. In such a scenario, the vaccine news has every reason to boost the energy sector. Invesco S&P 500 Equal Weight Energy ETF (RYE - Free Report) gained 17.3% on Nov 9.

Banks   

Banking stocks have been rather beaten down this year as fears of higher defaults at the household and corporate levels hit the space hard due to economic slowdown. Risk-on trade sentiments would boost the long-term treasury yields too. This would be beneficial for banking stocks’ net interest rate margins. SPDR S&P Regional Banking ETF (KRE - Free Report) added 15.4% on Nov 9.

Airlines

Airline stocks (one of the main victims of the coronavirus crisis) have been trying to bounce back on a rebound in travel demand.  This is especially true as the number of people going through airport security screening checkpoints improved in the August-September period. Better consumer confidence and some federal aid also boosted the airlines ETF in the past six months.                   

However, the latest rise in virus cases and no further stimulus once again started to bother the fund as US Global Jets ETF (JETS - Free Report) lost 1.2% past month. Vaccine news offered a fresh lease of hope to the fund, which gained 16.1% on Nov 9.

Real Estate

Real estate ETFs underperformed in the peak of the pandemic as there were missed/skipped rent payments both on household and commercial grounds. Now, the hope of economic recovery could turn the trend. IQ U.S. Real Estate Small Cap ETF (ROOF - Free Report) gained 10.3% on Nov 9.

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