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After a Historic November, What Awaits ETFs in December?

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November was a historic month for Wall Street with the Dow Jones Industrial Average logging its best month since January 1987. Meanwhile, the S&P 500 and the Nasdaq Composite Index enjoyed their best month since April. The soaring stock market has led to a huge rally in ETF world as well.

Vaccine optimism, the potential for a divided Congress with president-elect Biden and better-than-expected earnings has regained confidence. Notably, the divided government is favorable for the economy with lesser chances of major tax increases and tighter regulations. The prospect for smooth transition of Biden to the White House has also been improving.

The rally came despite the surge in coronavirus cases. Per the latest report, COVID-19 cases in the United States topped 4 million in November alone, more than doubling the one-month record of 1.9 million from just a month earlier. The situation resulted in lockdown measures in some cities of the United States, thereby affecting economic activities (read: COVID-Themed ETFs in Focus as Cases Soar Post Thanksgiving).

The similar trend is likely to continue in December with vaccine development on the one hand and a rising number of cases on the other. Further, most of the other developments in stocks or in specific sectors will determine the movement of the stocks this month.

Let’s delve into some of these events and learn how to tap the opportune moments with ETFs:

Tesla’s S&P 500 Debut

S&P Dow Jones Indices announced it would add Tesla to the index in a single tranche before market open on Dec 21. With the market capitalization of more than $500 billion, Tesla will be the largest company ever to be added to the index. Tesla’s addition to the S&P 500 will be based on the closing price on Dec 18, coinciding with the expiration of stock options and stock futures, which should help facilitate the addition because of the high trading volume.

The news has sparked heavy trades in the stock, as money managers will adjust their portfolios to make room for shares of the $538 billion company. iShares U.S. Consumer Goods ETF IYK, SPDR NYSE Technology ETF XNTK and ARK Autonomous Technology & Robotics ETF (ARKQ - Free Report) with large exposure to the electric car maker could be great ways to play. IYK has a Zacks ETF Rank #3 (Hold) while XNTK carries a Zacks ETF Rank #2 (Buy).

Vaccines

AstraZeneca (AZN - Free Report) has been the latest drug maker to announce strong efficacy data about its vaccine candidate. An interim analysis of phase 3 trials conducted in the United Kingdom and Brazil revealed that its coronavirus vaccine reduced the risk of symptomatic COVID-19 by an average of 70.4%. Meanwhile, Moderna (MRNA - Free Report) and Pfizer (PFE - Free Report) have filed for emergency use authorization with the FDA for its vaccine candidate after their late-stage trials showed around 95% effectiveness each against coronavirus. As such, the first dose of vaccine could come as early as this month (read: ETF Sectors to Bet on Positive Vaccine News).

A vaccine is being viewed as an end to the pandemic crisis that could lead to a swift recovery in the economy and provide a boost to the stocks. While the rally seems broad-based, the cyclical sectors are expected to benefit the most, as these are closely tied to economic activities and outperform when economic growth improves. Some of the solid picks from these sectors include U.S. Global Jets ETF (JETS - Free Report) , First Trust NASDAQ Global Auto ETF (CARZ - Free Report) , and SPDR S&P Regional Banking ETF KRE. All these have a Zacks Rank #3.

Value to Rule

Last month’s stupendous rally was led by value stocks, which were struggling this year from sluggish growth and lower yields. The potential arrival of a coronavirus vaccine will end the pandemic crisis and boost consumer spending in turn lifting value stocks. The dominance is expected to continue this month given the improvement in corporate earnings growth, expectation for quicker inflation and rising bond yields.

Some of the Zacks Rank #2 (Buy) popular ETFs from this space are Vanguard Value ETF (VTV - Free Report) , iShares S&P 500 Value ETF IVE, iShares Edge MSCI USA Value Factor ETF (VLUE - Free Report) and Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) .

Holiday Season

The holiday season started with a big bang with a large number of Americans turning online due to the pandemic. Per Adobe Analytics data, Thanksgiving online shopping jumped 21.5% year over year to a record $5.1 billion while Black Friday online sales surged 22% to a record $9 billion. Cyber Monday also brought in a record $10.8 billion in online spending (read: Online Holiday Shopping Hit Records: ETFs to Win & Lose).

The National Retail Federation forecast that holiday sales during November and December will increase 3.6-5.2% year over year to $755.3-$766.7 billion. As such, Amplify Online Retail ETF (IBUY - Free Report) , ProShares Online Retail ETF ONLN, SPDR S&P Retail ETF (XRT - Free Report) , VanEck Vectors Retail ETF (RTH - Free Report) , S&P SmallCap Consumer Discretionary Portfolio PSCD and Invesco DWA Consumer Cyclicals Momentum ETF PEZ looks compelling choices. XRT has a Zacks ETF Rank #2 while RTH, PSCD, and PEZ have a Zacks ETF Rank #3.

Santa Rally

A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e. between Christmas and New Year’s Day) that extends into the first two days of the New Year. The year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing, and the “January effect” should drive the stock upward and make December one of the best-performing months for the stocks. As such, high-beta and high-momentum ETFs like Invesco S&P 500 High Beta Portfolio SPHB, iShares Edge MSCI USA Momentum Factor ETF MTUM, and Invesco DWA Momentum ETF PDP are expected to lead the market in the final weeks of December.

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