The spread of coronavirus has been bad for stocks, and many exchange-traded funds that hold them. But four corners of the market—alternative energy, long-dated U.S. Treasuries, gold, and real-estate investment trusts—have shown some immunity. Here’s how things could play out if the spread of the disease worsens.
Oil-and-gas-related stocks and exchange-traded funds are almost certainly going to continue their recent declines if the coronavirus keeps proliferating. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) was down 25% for the year through Monday, while the First Trust Natural Gas ETF (FCG) was down 27%.
The virus, because of its potential effect on China and the global supply chain, has caused fears of an economic slowdown. And that usually sinks the price of oil, energy-related funds, and ETFs that hold transportation-related stocks. Oil itself has gone from around $60 at the start of the year to around $50.
The SPDR fund counts Apache (APA), Occidental Petroleum (OXY), and WPX Energy (WPX) among its largest holdings. Energy behemoths Exxon Mobil (XOM) and Chevron are not in the portfolio. They were down 18% and 12% respectively through Monday.
The First Trust fund counts Apache, Concho Resources (CXO), and ConocoPhillips (COP) as its top three holdings. They soak up more than 15% of the fund’s assets.
The Breakwave Dry Bulk Shipping ETF (BDRY) was down nearly 46% for the year through Monday. It doesn’t own stocks, but rather freight futures with a weighted average of around three months to expiration, making the fund vulnerable to increases and declines in maritime trade. The fund was down nearly 5% again on Tuesday, following a 7% swoon Monday.
On the positive side, Invesco Solar ETF (TAN) and ALPS Clean Energy ETF (ACES) were up 27% and 23% respectively for the year through Monday. Both were down nearly 4% yesterday, however. Less demand for energy could hurt the sector, but alternative power producers have the benefit of hope that they will gradually supplant fossil fuel in the future.
If industrial commodities are likely to respond poorly to a pandemic, high- quality bonds, seen as a haven asset, are likely to do better. The Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) was up nearly 17% for the year through Monday. U.S. Treasuries tend to rally when investors are fearful, and that should continue if the disease spreads more.
This fund has the added kicker of owning zero-coupon Treasuries. Those are bonds stripped of their coupons that trade at a discount to face value before maturity. Because they don’t have coupons and don’t deliver any cash flow before maturity, they have high durations or interest-rate sensitivity even relative to bonds with similar maturities that have coupons. Because rates have declined lately, the fund has done well. It will continue to do well if the disease spreads, the global economy stumbles, and rates go lower still.
Similarly, the Vanguard Extended Duration Treasury Index ETF (EDV) was up 15% for the year through Monday. This fund also owns long-term zero-coupon U.S. Treasuries.
Despite the overall toll on the stock market, technology and Internet stocks have held up well. Growth stocks have outperformed value stocks for the year so far, with the Russell 1000 Growth Index (.RLG) outpacing the Russell 1000 Value Index (.RLV) by 5 percentage points—3% compared to -2.21%—through Monday. Accordingly, the SPDR S&P Internet ETF (XWEB) was up 5.5% for the year through Monday. Its top holdings are Stamps.com (STMP), Zillow Group (Z), and Pinterest (PINS).
But tech and internet stocks may not be as sure a bet as Treasuries in the face of a pandemic. The internet ETF was down more than 4% on Monday.
Gold funds have done well, and, like Treasuries, they may well continue to do so. The SPDR Gold Shares ETF (GLD) was up more than 9% for the year, including a nearly 1% gain on Monday. Gold is another asset that often performs strongly when investors are fearful.
Finally, real-estate funds have performed strongly, posting gains of around 6%, including a 1% drop on Monday. Real-estate investment trusts, or REITs, pay out 90% of their net income in order to qualify for favorable tax treatment, so they often trade in line with Treasuries, another income-yielding investment, especially when the latter are posting big moves.
Since Treasuries have rallied so hard lately, REITs have also done well. But a pandemic will undoubtedly hurt some property types, notably hotels. And if the global economy experiences a protracted slowdown, REITs as a group will suffer, too. Still, REITs generally trade at prices giving them a dividend yield a bit more than 1 percentage point above that of 10-year U.S. Treasury debt.
Treasury yields are near record lows, so REIT yields—dividends as a share of the funds’ prices—are likely to remain low as well.
The bottom line is that REIT shares could remain more stable than the rest of the stock market.
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