ETF Strategies to Gain From the Stimulus & Vaccine Optimism

Sweta Jaiswal, FRM
·5-min read

Wall Street saw a decent February as the Dow Jones Industrials Average climbed 3.2% in the month. The other two broader indices, including the S&P 500 and the Nasdaq composite, gained 2.6% and 1%, respectively.

Observing the current market optimism regarding the positive developments in the additional round of fiscal stimulus and coronavirus vaccine development, it seems that Wall Street will witness a rally in March as well. Recently, the House of Representatives passed President Joe Biden’s $1.9-trillion stimulus package, also known as the American Rescue Plan Act of 2021. Notably, the Senate will now consider the legislation. In this regard, Biden has said that “Now, the bill moves to the United States Senate, where I hope it will receive quick action. We have no time to waste,” as mentioned in a CNBC article.

The coronavirus relief bill advanced by House Democrats provides direct support to small businesses, $1,400 direct checks to Americans earning less than $75,000 annually, a rise in the child tax credit, direct funding to state and local governments along with funding for schools and increased funds for vaccine distribution, per a CNN report.

On the vaccine front, the world will now receive the first single-shot vaccine in the battle against the coronavirus pandemic as the FDA has awarded the Emergency Use Authorization (EUA) to COVID-19 vaccine that has been developed by the Janssen Pharmaceutical Companies of Johnson & Johnson JNJ. The company has also informed that the U.S. Centers for Disease Control and Prevention's (CDC) Advisory Committee on Immunization Practices (ACIP) has recommended its COVID-19 vaccine. In fact, per the company, the ACIP recommendation will be sent further to the Director of the CDC and the U.S. Department of Health and Human Services (HHS) for assessment and adoption.

Johnson & Johnson has started shipping immediately and aims at delivering more than 20 million doses to the U.S. government in March and targets 100 million doses in the first half of 2021.

It is being believed that wider coronavirus vaccine rollouts are making a strong case in favor of faster U.S. economic recovery in 2021. Biden is expected to ramp up the distribution of coronavirus vaccines by dispensing more funds to local and state officials, increasing the number of vaccination sites and introducing a nationwide education campaign, per a CNBC article.

ETF Strategies to Play the Current Market Optimism

Here we discuss certain ETF strategies to help investors make the most of the upbeat U.S. economic data amid the coronavirus crisis:

Momentum ETFs to Consider

While the broader stock market is expected to gain on optimism surrounding the rebounding U.S. economy and positive developments in coronavirus vaccine research, momentum investing will likely take centerstage as investors seek greater returns in the short term. Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Investors can consider iShares MSCI USA Momentum Factor ETF MTUM, Invesco DWA Momentum ETF PDP, Invesco S&P MidCap Momentum ETF (XMMO), VictoryShares USAA MSCI USA Value Momentum ETF (ULVM) and SPDR Russell 1000 Momentum Focus ETF (ONEO) (read: Take a Look at These 5 ETFs to Ride the Market Bulls).

Growth ETFs to Play

Growth stocks are generally expected to witness a positive revenue and earnings trend at a faster rate than the industry average. As such, growth funds tend to outperform during an uptrend. While there are several options in the growth ETF world, we have highlighted five funds that offer broad-based exposure to the U.S. stock market like Vanguard Growth ETF VUG, Schwab U.S. Large-Cap Growth ETF SCHG, iShares Core S&P U.S. Growth ETF (IUSG), SPDR Portfolio S&P 500 Growth ETF (SPYG) and Vanguard Mega Cap Growth ETF (MGK) (read: ETFs to Win/Lose Amid Rising Inflationary Bets).

Small-Cap ETFs to Look Out For

Small-caps stocks, as indicated by the Russell 2000 Index, have been outperforming the broader market and hitting new all-time highs. This upside is being largely led by small-cap companies that are closely tied to the U.S. economy and thus well-positioned to outperform when the economy improves. These stocks generally outperform on an improving U.S. economy. The latest release of economic data is also indicating toward an improving economy. Therefore, investors can consider Schwab U.S. Small-Cap ETF SCHA, SPDR S&P 600 Small Cap ETF SLY, Vanguard S&P Small-Cap 600 ETF (VIOO) and John Hancock Multifactor Small Cap ETF (JHSC) (read: 5 ETFs That Deserve a Place in Your Portfolio).

Cyclical Sector ETFs to Watch Closely

In the current scenario,bulls are riding in favor of stocks in the cyclical sectors like industrial, financial, energy and consumer discretionary. Notably, stocks within the cyclical sector mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors will automatically perform well. Let’s look at some popular ETFs belonging to the cyclical sector which can gain in the present situation -- Energy Select Sector SPDR XLE, Fidelity MSCI Materials Index ETF FMAT, Invesco KBW Bank ETF (KBWB) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) (read: Cyclical ETFs to Gain Amid the Bullish Market Scenario).

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