You miss all of the shots you don't take. Don't put all your eggs in one basket. Both well-known adages are true, especially when it comes to investing. You have to take a risk to make money. Diversification lowers your risk.
These two concepts have led to tremendous popularity for exchange-traded funds (ETFs). Buying an equity ETF allows you to spread your investment across multiple stocks. And you can even target the specific kinds of stocks you want to invest in with certain ETFs.
With the coronavirus pandemic creating opportunities for several companies, it's not surprising that ETFs are now available that focus on the stocks of companies developing COVID-19 diagnostic tests, therapies, and vaccines or that could benefit in other ways from the viral outbreak. But should you invest in coronavirus ETFs?
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What coronavirus ETFs are available?
As you might expect, the alternatives for coronavirus ETFs are limited. After all, the World Health Organization officially declared COVID-19 as a pandemic less than six months ago. However, there are a handful of coronavirus ETFs from which to choose.
The ETF Managers Treatments, Testing and Advancements ETF was formed in June 2020. This ETF currently holds positions in 56 stocks. Its top holdings include biotech stocks Alnylam Pharmaceuticals and Moderna (MRNA 0.89%) as well as lab stocks Bio-Rad Laboratories, LabCorp, and Quest Diagnostics.
Another coronavirus-focused ETF is the Pacer Biothreat Strategy ETF. The ETF states that it invests only in "U.S. listed companies whose products or services help to protect against, endure or recover from biological threats to human health." It currently holds positions in 45 stocks. Interestingly, NVIDIA (NVDA 3.10%) and Amazon (AMZN 2.39%) are the VIRS ETF's two biggest holdings.
Direxion took a different approach with its Direxion Work From Home ETF. As its name indicates, this ETF focuses on stocks of companies that could benefit from the working-from-home trend that has accelerated during the COVID-19 pandemic. The Direxion ETF is loaded with tech stocks, with Twilio, Inseego, and Crowdstrike (CRWD -1.76%) among its top holdings.
Major drawbacks
One drawback to investing in these coronavirus ETFs is that they have relatively low liquidity. This means that it could take longer to sell when you need to, which could result in a lower price.
For example, the average trading volume for the Pacer Biothreat Strategy ETF is only around 13,000 shares. The Direxion Work From Home ETF looks somewhat better with an average trading volume of around 82,000 shares. The ETF Managers Treatments, Testing and Advancements ETF is the highest of the three with an average trading volume of roughly 147,000 shares. All three ETFs, though, have much lower average trading volumes than the top stocks that they own.
All ETFs charge expense-related fees. You can compare different ETFs based on their expense ratios -- the total of annual expenses as a percentage of the fund's assets. Several major index ETFs have expense ratios below 0.1%. But the expense ratios of the coronavirus ETFs are much higher.
The Direxion Work From Home ETF's expense ratio stands at 0.45%. And it's the least expensive ETF of the group. The ETF Managers ETF has an expense ratio of 0.68%. The Pacer ETF's expense ratio of 0.7% is even higher.
Smart investing option?
My view is that buying these coronavirus ETFs isn't the smartest move. In addition to the previously mentioned drawbacks, these ETFs have underperformed the S&P 500 index so far this year.
I think that a better option is to invest in the best stocks held by these ETFs. For example, Amazon, Crowdstrike, Moderna, and NVIDIA have delivered better gains than any of the coronavirus ETFs have. Each of these stocks has much greater liquidity with no annual expense fees.
With the low costs of trading these days (and with some trading platforms, no costs), you can build your own version of a coronavirus ETF that could be a much bigger winner than any of the actual coronavirus ETFs on the market.
