Market Outlook

The ETFs beating the market as downturn continues

Investors would be hard-pressed to find an exchange-traded fund (ETF) that has gained since the economic toll of the coronavirus began to emerge in February.

There is however a selection of industry-based ETFs that have proven more resilient than the wider market. They have also been able to make greater and more sustained gains as markets have attempted to claw back some of the losses. Biotech, gaming and consumer essentials are all such industries.

Here are the three ETFs to watch across these sectors during the COVID-19 pandemic:

 

iShares Nasdaq Biotechnology ETF [IBB]

With biotech companies possibly developing a cure for the coronavirus, many firms’ share prices have rallied amid the crisis. This has meant that the iShares Nasdaq Biotechnology ETF — despite falling nearly 13% since the crisis began — has performed far better than the wider market.

The ETF also bottomed out faster on 16 March and has gained 19.7% to 8 April. In comparison, the Nasdaq has gained 17.4% in the same period, whereas the further diversified S&P 500 is up just 15.3% in that time.

19.7%

Rise of the iShares Nasdaq Biotechnology ETF since 16 March

 

These gains could be set to continue as the race for a vaccine gets closer and investment is poured into healthcare and research by governments. There are currently at least 43 vaccines in development globally, including by Gilead [GILD] — the most heavily weighted stock in the index — as well as Amgen [AMGN] and Regeneron [REGN].

On 2 March, The ETF popped 3.76%. As it is unclear which company will be first to create the most effective cure for the virus, this large cap-focussed ETF is worth a look for investors or traders seeking broad exposure to this theme.

Furthermore, the demand for medicine for other diseases will, of course, continue, meaning that the bottom line of many drug and biotech companies may not be adversely hit.

As Vertex Pharmaceuticals CEO Jeffrey Leiden recently pointed out: “It is important for the medical and patient community to know that we remain highly confident in our ability to continue to supply all of our medicines uninterrupted to patients around the world who rely on them. We are well-prepared from a business continuity perspective, with ample supply to meet commercial needs well into the future.”

“It is important for the medical and patient community to know that we remain highly confident in our ability to continue to supply all of our medicines uninterrupted to patients around the world who rely on them” - Vertex Pharmaceuticals CEO, Jeffrey Leiden

ETFMG Video Game Tech ETF [GAMR]

While there has been extensive noise around streaming and stocks related to working from home amid the pandemic, gaming has largely slipped under the radar.

The industry has quietly been performing well. The likes of the ETFMG Video Game Tech ETF bottomed out earlier than the wider market on 16 March, gaining 19.8% since then, (through 8 April). It is also down just 8.8% since 20 February, while the S&P 500 has dropped 18.5%.

19.8%

ETFMG Video Game Tech ETF gains since 16 March

 

On the gaming sector, analyst Cowen Doug Creutz recently told Barrons: “We believe that the video game sector rather uniquely is poised to see very little disruption to results over the next 12 months in all but the most severe scenarios. As such, we view the sector as a logical place to favor in the current volatile market environment.”

He said it’s worth noting that these companies “generally have cash-rich balance sheets, with little or no debt” and for that reasons, the sector is unlikely to face liquidity issues that could be imposed by strains on the financial system in the event of a recession.

“We believe that the video game sector rather uniquely is poised to see very little disruption to results over the next 12 months in all but the most severe scenarios. As such, we view the sector as a logical place to favor in the current volatile market environment” - analyst Cowen Doug Creutz

Creutz’s stocks to watch (in order) are Zynga [ZNGA], Electronic Arts [EA], Glu Mobile [GLUU] and Take-Two Interactive Software [TTWO]. Meanwhile, he rated Activision Blizzard [ATVI] and Ubisoft Entertainment [UBI] market perform as of 16 March. All of these stocks, apart from Take-Two, are constituents of the GAMR ETF.

Since then, more analysts have pointed out the potential of gaming stocks, with Activision a recent focus — MKM Partners analyst Eric Handler upgraded the stock to buy from neutral on 2 April, triggering the stock to bounce 6%.

 

Vanguard Consumer Staples Index Fund ETF Shares [VDC]

Consumer staples haven’t weathered the storm quite as well as biotech and gaming but have nevertheless outperformed the wider market — largely due to panic buying in reaction to the emerging pandemic.

VDC, which holds stocks including Walmart [WMT], Costco [COST] and Procter & Gamble [PG] has gained 18.73% since hitting a multi-year low on 23 March (through 8 April) to put it slightly ahead of the S&P 500. It is also down just 11.3% since 20 February — a big contrast to the S&P’s loss of 18.5% over the same period.

18.73%

Vanguard Consumer Staples Index Fund ETF gains since 23 March

 

Going forward, many of the constituents of VDC are also poised to be hit less than the wider retail sector, which will see a knock-on from reduced consumer spending. This is likely to have less of an impact as much of the items the VDC companies produce are deemed essential for households.

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