Data confirm that the novel coronavirus is adversely affecting discretionary and retail spending, pressuring related equities and entertainment ETFs in the process.
March retail sales posted the worst decline on record, and while the Consumer Discretionary Select Sector SPDR (XLY) is outperforming the S&P 500 by about 100 basis points this year, that’s somewhat misleading. That outperformance is due to XLY’s hefty weight to Amazon (AMZN), a discretionary stock that’s being seriously boosted by consumers’ rapid buying of staple goods.
Here are some more straightforward entertainment ETFs currently on sale due to coronavirus volatility that may be worth a look over the near-term for investors:
- Communication Services SPDR Fund (XLC)
- VanEck Vectors Gaming ETF (BJK)
- Invesco Dynamic Leisure and Entertainment ETF (PEJ)
Depending on how the funds in question are structured, there are some examples of entertainment ETFs holding up better than the broader market, but there are also examples of funds in this category that are getting drubbed.
Communication Services Select Sector SPDR Fund
Expense ratio: 0.13% per year, or $13 on a $10,000 investment.
The Communication Services SPDR Fund (XLC) is up more than 17% over the past month, so its look of being on sale is fading, but the fund is still lower by almost 10% this year, meaning investors can access a quality product at lower prices today than what was available in early January.
There are multiple reasons for XLC’s less-bad showing relative to broader markets this year and its impressive resurgence over the past month.
First, there’s the massive cash hoards of top two holdings Facebook (FB) and Alphabet (GOOG, GOOGL). Those sturdy balance sheets equal quality at a time when riskier companies are most vulnerable to negative Covid-19 news.
Second, Netflix (NFLX) is being widely embraced as the quintessential “stay at home” equity play as highlighted by a year-to-date gain of almost 31%.
With XLC, the wild card is Disney (DIS). The company is being hindered on multiple fronts. Theme parks and movie theaters are closed, while ESPN is surviving on reruns of old games and sports documentaries. Plus, Disney just announced the furloughs of half its workforce, but made the gaffe of not revealing any reductions in executive pay.
Still, with Alphabet and Facebook being the most important names in XLC, the fund could emerge stronger as the virus situation eases.
VanEck Vectors Gaming ETF
Expense ratio: 0.66% per year
Like it or not, gambling is a form of entertainment and the VanEck Vectors Gaming ETF (BJK) is the lone exchange traded fund dedicated to this pursuit. Pun intended: BJK is a gamble here because the industry the fund focuses on currently faces multiple headwinds.
BJK allocates nearly 57% of its weight to the U.S. and China, with the latter exposure essentially meaning Macau. That Chinese territory already dealt with a 15-day coronavirus closure of casinos in February and visits to the gaming mecca aren’t anywhere near rebounding.
Consensus among analysts its that the current and third quarters will be brutal before things start to get better in the last three months of this year, but it could take until 2022 before Macau revenue exceeds the numbers posted last year.
Then there is the embattled U.S. gaming industry, where all casinos currently remain closed with little visibility on when those venues will reopen. Even when the Las Vegas Strip reopens, it’ll be gradual and it’ll be some time before venues there are firing on all cylinders.
Plus, there are no guarantees gamblers will eagerly hop on planes to visit Sin City in a post-virus world. Additionally, the economy will have a say in the matter. If the unemployment rate is lingering around 10%, it’s hard to imagine folks will be eager to risk the money in their pocket.
Another reason why BJK is risky is that its tempting dividend yield of 4.68% is another example of a mirage. Las Vegas Sands (LVS), the ETF’s largest holding, recently suspended its payout and several Macau operators scrapped 2019 dividends, meaning the fund’s yield is destined to fall, and not for a good reason.
Still, it’s hard to ignore the fact that BJK is up 45.21% over the past month, a run that indicates some investors are betting the worst news affecting the gaming industry is already being priced into the relevant stocks. For risk-tolerant investors, BJK could be worth a small flier over the next several months.
Invesco Dynamic Leisure and Entertainment ETF
Expense ratio: 0.63% per year
More than the other funds mentioned here, the Invesco Dynamic Leisure and Entertainment ETF (PEJ) is incurring significant punishment this year, down 42.64%, and its recent rebound is limited relative to the BJK and XLC.
However, PEJ may be worth a look due to the unique methodology used by the Dynamic Leisure & Entertainment Intellidex Index, the fund’s underlying benchmark. That index “is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
The long PEJ thesis revolves exclusively around the ability of the U.S. economy to rebound from the coronavirus, as the bulk of the fund’s 30 components derive most of their revenue within the U.S.
The variable in PEJ’s quest for a rebound likely lies with airlines, which account for 22.5% of the roster. There’s no denying that industry is being dramatically reshaped by Covid-19. It’s now a question of whether customers and investors will accept a new normal.
A potential bright spot for PEJ is that it has limited gaming exposure, and no weight to cruise operators.
As of this writing, Todd Schriber did not hold a position in any of the aforementioned securities.
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