We're just past the first half of -- shall we say -- an eventful 2020. The COVID-19 pandemic broke out across the world in early March, causing the sharpest 30% decline in market history. That was followed by the biggest recovery in history, with the overall market miraculously up 2.5% on the year.
Yet even though the markets have gotten back to even, so to speak, the pandemic is still raging. Adding to the uncertainty, the benefits of the initial CARES Act stimulus bill passed in March are running out. As of this writing, politicians in Washington still haven't passed a new bill -- though one should, in theory, be coming.
The considerable uncertainty has led to a bifurcation the market. Though the market is up slightly on the year, almost all the gains have gone toward the technology sector, and more modestly, for consumer discretionary stocks as well, likely due to e-commerce spending. The rest of the market has been hit hard, with particularly economically sensitive sectors such as financial and energy still down huge amounts from the start of 2020.
What's shocking about all this is that even prior to the outbreak, technology had been outperforming the cyclical sectors of the market for years, and the COVID-19 pandemic, rather than changing everything, only exacerbated already-existing trends.
So, should investors play for the continuation of these trends, or make a play for the more beaten-down sectors of the market? I recently wrote a piece on some top technology ETFs geared toward people either in their 20s or who are looking for more growth in their portfolios.
But for investors looking to play for an economic recovery in more beaten-down sectors of the market -- and a potential COVID-19 vaccine could provide a catalyst for that later this year or in 2021 -- here are ETFs across the energy, financial, and leisure-related sectors that offer just that: diversified plays on an economic recovery.
Fidelity MSCI Energy Index ETF (FENY)
According to Fidelity, the hardest-hit sector of the market during the first six months of the year was the energy sector. As shelter-in-place orders occurred throughout Asia and then the developed world, energy demand fell through the floor -- literally. Hovering in the low $50 range prior to the pandemic, West Texas Intermediate actually crashed into negative territory on April 20 this year, as the U.S. ran out of storage capacity. International Brent Crude held up much better, hitting the low $20 range around that time.
However, since then, agreed supply curbs from OPEC+ and the United States back in April have helped oil prices stabilize and make their way back up into the $40 range. Yet while the energy sector bounced back strongly, increasing 30.5% in the second quarter, the sector still remained down 35.3% on the year through June 30, showing just how drastic its initial fall was.
As economies open back up, demand should increase this year; however, it appears as though OPEC+ will also be easing its collective supply cuts, which will put the oil industry in a delicate balance as we head into the winter months.
For those looking to bet on a rebound the energy sector, the Fidelity MSCI Energy Index ETF (NYSEMKT:FENY) is a way to get diversified exposure at low cost. The ETF has a mix of diversified players, upstream players, pure midstream pipeline companies, oil service companies, and downstream refiners. And what really stands out is the dividend yield on the index, which is a remarkably high 9.8%. That's pretty good considering the expense ratio on this ETF is only eight basis points (0.08%).
However, the high yield is more about the sector's stock price declines rather than increasing payouts, which means some dividends could be in danger. Another potential red flag is the ETF's heavy concentration in integrated U.S. oil majors Exxon (NYSE:XOM) and Chevron (NYSE:CVX), which combine to account for about 44% of the entire market-cap weighted ETF. Exxon just reported a worse-than-expected quarter last week, but of course, the second quarter was truly unique, and the company plans to maintain its dividend -- at least for now. You also don't get exposure to foreign oil giants such as Total (NYSE:TOT) or Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).
Still, for those looking to bet on a turnaround in the overall energy sector, the FENY ETF is a low-cost way to get diversified exposure, and the largest components of the index are retaining their payouts as of now.
Financial Select Sector SPDR Fund (XLF)
The next most beaten-down sector during the first half of 2020 was the financial sector, down 23.6% in the first half of 2020. The reasons aren't hard to guess; in anticipation of widespread defaults, both in the consumer and corporate sector, big banks took tremendous writedowns in both the first and second quarters. Additionally, though all major banks suspended their share repurchases in the early days of the crisis, a new rule from the Federal Reserve requires that large U.S. banks cap their dividends to below the average net income over the past four quarters. That has already led to dividend cuts for Wells Fargo (NYSE:WFC) as well as Capital One (NYSE:COF). And even when the economy does recover, interest rates are likely to remain low for a while, which may cap banks' net interest margins.
Still, the financial sector has fallen a lot, and the large banks are preemptively preserving capital, meaning they are not in trouble of going out of business as they were back in 2008. That could make the financial sector one of the safer ways to play an overall economic recovery.
The diversified Financial Select Sector SPDR Fund (NYSEMKT:XLF) is a low-cost way to play the financial sector, with exposure to large banks, insurance companies, capital markets exchanges, and even some mortgage real estate investment trusts, all coming with a low expense ratio of just 13 basis points (0.13%).
The ETF is market-cap weighted, so it's exposed to the highest-quality diversified financial companies, with Warren Buffett's conglomerate Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) the largest weighting at 14% of the ETF and JPMorgan Chase (NYSE:JPM) the second largest at 11.1%. The next largest weighting is in Bank of America (NYSE:BAC) at just a 7.2% weighting, and it gets more diversified from there. The ETF has a total of 66 large companies under its umbrella and yields a respectable 2.6%, despite Berkshire Hathaway, which doesn't pay any dividend, being the highest-weighted stock.
Invesco Dynamic Leisure and Entertainment ETF (PEJ)
Looking to play a rebound in certain consumer discretionary sectors of the economy? The Invesco Dynamic Leisure and Entertainment ETF (NYSEMKT:PEJ) is an interesting mix of beaten-down travel, restaurant, and cable TV stocks. Each segment is differently affected by the coronavirus, but in general these stocks cater to people who want to go out to eat and have a good time. The ETF appears to be actively managed, with 30 holdings that appear to be chosen by the ETF's managers and rebalanced four times per year.
The hodgepodge of recovery stocks includes travel heavyweights Walt Disney (NYSE:DIS) and Hilton Worldwide Holdings (NYSE:HLT), but then there are also restaurants that have been doing well in the pandemic, such as Chipotle Mexican Grill (NYSE:CMG) and Domino's Pizza (NYSE:DPZ). Also among the largest holdings? Cable broadcaster and Showtime parent ViacomCBS (NASDAQ:VIAC).
It's a slightly confusing mix of beaten-down value stocks as well as growth stocks, and the expense ratio is a tad high at 0.63%. Still, this ETF is down 33% on the year, and has a lot of marquee leisure brands under its wing. That means PEJ could rocket higher if and when a COVID-19 vaccine is developed.