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ETF Strategies to Follow With U.S. Economy Slowly Reopening

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U.S. stocks have been steady of late with investors shifting focus to the reopening of economy and an improvement in virus cases. Recent data points show that the outbreak is gradually coming under control, even in the hardest-hit states. Some upbeat tech earnings and positive Data for Gilead's (GILD - Free Report) Remdesivir will act as tailwinds in the near term (read: Wall Street At 7-Week High: 5 Sector ETFs On Fire).

Treasury Secretary Steven Mnuchin indicated that we may see “the economy really bounce back in July, August and September” after reopening in May and June. We all know, there is a mammoth Fed and government stimulus to aid market recovery. The Fed has cut rates to zero and launched unlimited QE. It also agreed to buy highly rated corporate bonds.

Moreover, the Fed announced an investment of up to $2.3 trillion in loans to aid small and mid-sized businesses, and state and local governments, and to purchase of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.

Plus, the government’s $2-trillion package and the extension of the Paycheck Protection Program (PPP), which is called Phase 3.5, will act as a tailwind to small-cap stocks. Against this backdrop, we highlight a few ETF investing strategies that could be gainful.

Small Caps to Pick Up Steam

Coronavirus-led lockdowns and shutting down of businesses hit the small-cap segment hard as these pint-sized stocks are more focused on the domestic economy.  However, the easing of the social distancing norm, the U.S. government’s virus relief bill toward helping small-cap stocks and the Fed’s main street lending program should not benefit small caps.

The segment’s relative underperformance compared to the large caps will go in favor of the likes of iShares Edge MSCI Multifactor USA Small-Cap ETF (SMLF - Free Report) and Invesco PureBeta MSCI USA Small Cap ETF PBSM (read: Small-Caps Bounce Back: Buy 8 Trending ETFs).

Expect a Big Bounce in Energy Stocks

Oil witnessed a Black April on extremely weak demand amid lockdown, ample supplies and storage crisis. May WTI crude contract fell to the negative territory on Apr 20, for the first time in history and the June contract also suffered lately. But the demand scenario is more bullish for later months thanks to the gradual reopening of economies.

This took the oil market in contango, which means futures contracts trading at a premium to the spot price. No wonder, VanEck Vectors Oil Refiners ETF (CRAK - Free Report) , VanEck Vectors Oil Services ETF (OIH - Free Report) and Energy Select Sector SPDR Fund (XLE - Free Report) will receive a new lease of life after the reopening (read: Oil in Great Contango: Here's How to Play With Crude ETFs).

Retail to Roll Ahead, But With a Tilt Toward Online Activity

Retail — predominantly dependent on consumer discretionary activity — had a painful stretch at the peak of the pandemic due to store closures. Gradual reopening of businesses and job creations should favor this hard-hit sector. Cheap oil price is another positive for the sector. Moreover, online retailing will continue to favor the space in the post-outbreak economy (read: What's in Store for Online Retail ETFs This Earnings Season?).

However, the recovery may be rough with consumers being cash-strapped. Notably, SPDR S&P Retail ETF’s (XRT - Free Report) top-10 holdings are filled with online retail, dollar stores and grocery stores, which are hot investment themes right now. The fund gained 13.3% past week (as of Apr 29, 2020) (read: Sector ETFs to Win or Lose on Oil Collapse).

After a Halt, Transportation May Now Move Forward

The Transportation sector, which was thrashed before, may move forward. iShares Transportation Average ETF (IYT - Free Report) puts 38.4% weight in Railroad and 18.9% in trucking. Opening of the domestic economy should favor these two categories amid low oil prices. The still-struggling airlines space has only 9% weight. Since International travels are still unsure, it is better to have less focus on this segment. However, Air Freight & Logistics has about 27.5% focus on the fund.

Banks May See Some Respite After a Bumpy Ride

Banks took a beating on apprehensions of higher delinquencies. Meanwhile, banks raised the credits standard. Huge government support and protection for small caps reduced delinquency risks to some extent. Plus, the economic reopening and an expected bounce in the market may boost long-term U.S. treasury yields, which in turn may favor the once-beaten down and undervalued bank stocks. SPDR S&P Bank ETF (KBE - Free Report) and Invesco KBW Bank ETF (KBWB - Free Report) look decent bets for the near term (read: Bank ETFs Struggling on Mixed Earnings & Coronavirus-Hit Views).

Momentum ETFs Should Gain Traction

A stock market bounce can be tapped via stocks that are on high momentum. Fidelity Momentum Factor ETF (FDMO - Free Report) , Invesco S&P 500 Value with Momentum ETF (SPVM - Free Report) and iShares Edge MSCI USA Momentum Factor ETF (MTUM - Free Report) and First Trust Dorsey Wright Momentum & Value ETF DVLU are some of the ways to play the strategy.

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