ETF Strategies to Play as the Coronavirus Outbreak Aggravates

Sweta Jaiswal, FRM
·6-min read

Investors seem to be spooked by the worsening coronavirus outbreak in the United States at a time when the U.S. presidential elections are very close. The world’s largest economy has already recorded more than 8.6 million coronavirus infections, with a death toll of about 225,230. Going on, the nation witnessed two highest single-day new coronavirus cases on Oct 23 and 24 of more than 83,000 each day, per a CNN report. Commenting on the current scenario, former FDA Commissioner Scott Gottlieb told CBS News that the United States is at a "dangerous tipping point," according to a CNN report.

Making the situation worse are concerns that another round of business restrictions and lockdown measures might derail the economic recovery achieved so far. Notably, the outbreak has already caused an unprecedented collapse of economic activities as governments had to shut down commerce and implement social-distancing measures in an effort to contain the spread of the virus. Thus, the halting or rolling back of the reopening process may hurt investors’ sentiments and optimism surrounding economic recovery in the near term.

Considering the current scenario, it looks like another round of stimulus will be absolutely necessary for cushioning the economy amid this health crisis. Moreover, this election year could be the worst period, with the coronavirus pandemic intensifying by the day. Historically, the stock markets are found to have exhibited volatility in the month before the elections.

In such a scenario, investors can take a look at the following ETF strategies to combat the coronavirus crisis:

Play the Inverse ETFs

The pandemic-induced volatility can boost demand for inverse or inverse-leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding impact, investors can earn higher returns in a shorter period of time, provided the trend remains favorable. However, these funds run the risk of huge losses compared with traditional funds in fluctuating markets. So, investors intending to play against the tumbling Dow Jones, might tap  ProShares Short Dow 30 DOG, ProSharesUltraShort Dow30 (DXD)  and ProSharesUltraPro Short Dow30 (SDOW).

Add Quality With These ETFs

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. They also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help in lowering volatility and perform rather well during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.

Quality ETFs could enjoy smooth trading and generate market-beating returns in the current market environment. Given this, investors can consider iShares Edge MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF (SPHQ) and Barron's 400 ETF (BFOR) (read: Winning ETF Strategies for Q4).

Invest in the New Normal

Considering the aggravating coronavirus situation, work-from-home and online shopping, digital payments, video streaming and video gaming are gradually rising, becoming the “new normal.” Thus, investors can consider funds providing exposure to such trends in the current scenario -- First Trust Dow Jones Internet Index FDN, First Trust Cloud Computing ETF SKYY, Global X Social Media ETF (SOCL) and Direxion Work From Home ETF (WFH) (read: Netflix Disappoints: ETFs in Focus).

Dividend ETFs to the Rescue

In a low-interest rate environment, dividend investing becomes a hot spot. Thus, dividend ETFs like WisdomTree U.S. Quality Dividend Growth Fund DGRW, FlexShares Quality Dividend Defensive Index Fund (QDEF), WBI Power Factor High Dividend ETF (WBIY) and Schwab US Dividend Equity ETF (SCHD) might be compelling picks now (read: A Quick Guide to Dividend Aristocrat ETFs).

Gold ETFs: Popular Safe-Haven Asset

Price of precious metals like gold rises during turbulent market conditions as these are considered safe-haven assets. In the present low-rate environment, gold should do well. Going by new data released by World Gold Council, gold-backed ETFs witnessed 10 consecutive months of positive flow in September and added 68.1 tons equivalent to around $4.6 billion or 2% of assets under management. Notably, in the first nine months of 2020, global net inflows of gold ETFs were at 1,003 tons ($55.7 billion) per the World Gold Council, beating the record of 646 tons set in 2009. 

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares GLD, iShares Gold Trust (IAU), SPDR Gold MiniShares Trust (GLDM)  and GraniteShares Gold Trust (BAR) are some of the popular ETFs (read: Gold ETFs Look Attractive on Rising Market Uncertainties).

Minimize Volatility With ETFs

Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products generally do not surge in bull market conditions but offer protection against the unpredictable ones. Providing more stable cash flow than the overall market, these funds are less cyclical in nature. Here are some options --  iShares Edge MSCI Min Vol USA ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV, iShares Edge MSCI EAFE Minimum Volatility ETF (EFAV), iShares Edge MSCI Min Vol Global ETF (ACWV ), Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: ETFs to Minimize Volatility Amid Pausing Coronavirus Trials).

Bet on Non-Cyclical Consumer Staple Sector

This non-cyclical sector is likely to be less hammered by any market crash. The sector can emerge as a true safe haven amid the crisis, as even people on self-quarantine need daily essentials. Investors can consider The Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, iShares U.S. Consumer Goods ETF (IYK) and Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS).

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.  Get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SPDR Gold Shares (GLD): ETF Research Reports
 
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
 
iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports
 
WisdomTree U.S. Quality Dividend Growth ETF (DGRW): ETF Research Reports
 
Proshares Short Dow30 (DOG): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
Invesco SP 500 Low Volatility ETF (SPLV): ETF Research Reports
 
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
First Trust Dow Jones Internet ETF (FDN): ETF Research Reports
 
First Trust Cloud Computing ETF (SKYY): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report