Coronavirus vaccines are in the news every day as people across the globe look for relief from both the deadly disease and the behavioral restrictions necessary to stem its spread. But now, with three different COVID-19 vaccine candidates having shown high effectiveness in phase 3 trials (and many more candidates being tested in human studies), some investors sense a light at the end of the tunnel.
Even if the pandemic disappeared tomorrow, there would still be a number of challenges to overcome in order to ramp the U.S. economy back up to its 2019 levels, but the risks of protracted struggles are still priced into some stocks. If you think that a vaccine-fueled economic rebound is around the corner, this may be a great time to purchase these three exchange-traded funds (ETFs) at a discount to hold over the long term.
Preparing for the airline stock recovery
The U.S. Global Jets ETF (JETS 0.59%) holds approximately different 40 airline stocks, with a heavy concentration in U.S.-based carriers. JETS is down 24% year to date due to the complete meltdown in passenger air travel earlier this year. Airlines will benefit from pent-up demand once travel restrictions are lifted and travelers' concerns are eased, but industry leaders are still forecasting a multi-year recovery period. It may take some time for people to feel comfortable entering the close quarters of planes and airports. And, after having laid off significant portions of their workforces, it will take airlines some time to rebuild passenger capacity.
Some players may experience prolonged distress stemming from this crisis, but investors can expect that the industry as a whole will eventually recover. The JETS ETF lags the S&P 500 by 34 percentage points year to date, despite airlines stocks generally trading at modest valuation ratios relative to other industries.
Significant downside is already priced into these stocks, so investors should expect some appreciation in the event that economic activity rapidly improves next year.
Travel technology provides rebound and long-term upside
The ETFMG Travel Tech ETF (AWAY) holds nearly 30 technology stocks that facilitate travel and tourism activities across the globe. These companies engage in activities such as booking, ridesharing, and attraction reviews. The ETF lagged the S&P substantially for most of 2020 before a sharp November rally pulled it within seven percentage points of the large-cap index and gave it a 4% gain on the year.
The same conditions that punished airlines earlier this year put the squeeze on travel tech businesses. The easing of restrictions would be a fundamental catalyst for the industry. The Travel Tech ETF has a more geographically diverse portfolio than JETS, which gives it broader exposure to conditions in global markets. Further, its technology focus offers greater medium-term growth potential than can be found in the more mature airline industry.
Investors should recognize that the AWAY ETF is a small niche fund, which has some drawbacks. Its 0.75% expense ratio is quite high, especially for a passively managed fund. It also does not trade at a high volume, with an average bid-ask spread of nearly 0.4%. These issues will be less meaningful for long-term investors, but they will erode returns.
Betting on the banks
The banking industry is once again experiencing turmoil amid a global economic crisis, though not nearly to the same degree that it did during the Great Recession. Rock-bottom benchmark interest rates are creating a challenging environment for lenders, while the closures of branches and offices led to logistical and competitive difficulties. Perhaps most importantly, banks are likely to be hurt as struggling businesses and households hit by unemployment default on loans. Deloitte has forecast that U.S. banks will take loan losses of $318 billion between 2020 and 2022, amounting to about 3.2% of total loans. While that's a high level of defaults, the damage from the Great Recession was worse: From 2008 to 2010, U.S. banks' loan-loss ratio was 6.6%.
With investors concerned about those issues, many have fled from banking stocks. The SPDR S&P Bank ETF (KBE 0.76%) is down 10% year to date. But if effective COVID-19 vaccines quickly ease the economic pain around the globe, then the banking sector's performance in late 2021 and 2022 will probably exceed forecasts. Fewer businesses will shut down, more people will remain employed, and fewer will default on mortgages, business loans, and credit card debt.
KBE is a large, diversified, reputable, and liquid ETF with a reasonable expense ratio that distributes cash to shareholders every quarter. It's a great vehicle for exposure to the banking industry, which is set to move in sync with the fortunes of the wider economy.