ETF Strategies to Ride the Year-End Santa Rally

Santa Claus has been kind to Wall Street as the market ended the last week in the green despite initial weakness due to Omicron fears. The Dow Jones Industrial Average increased about 1.6%. The S&P 500 jumped 2.3% and the Nasdaq Composite rose 3.2% in the last week ending Dec 24.

Reopening plays in sectors like airlines, cruise lines and entertainment saw increased investor attention. Carnival (NYSE:CUK) and Hilton Worldwide climbed about 16% and 9.8%, respectively in the holiday-shortened last week.

Investors gained optimism from some of President Joe Biden’s encouraging announcements. Biden stated that booster shots provide strong protection against COVID-19 (per a CNBC article). He also mentioned that the United States will not slip into the intense pandemic conditions faced during March 2020.

Updating about his preparations for the healthcare infrastructure and arrangements, Biden mentioned that the White House is buying 500 million at-home COVID-19 tests that will be available at free of cost for Americans from 2022 (as stated in a CNBC article). Biden also mentioned that 1000 medical personnel will be allocated from the military to assist hospitals if the situation gets severe in January and February.

Notably, three studies from South Africa, England and Scotland demonstrated that the Omicron variant is milder in comparison to the other variants and has been observed to result in lower chances of hospitalization (per a CNBC article).

Moreover, the emergency use authorization (EUA) for Pfizer Inc.’s (NYSE:PFE) antiviral COVID-19 pill, PAXLOVID has relaxed concerns regarding Omicron to some extent. Pfizer can begin delivering PAXLOVIDin the United States on an immediate basis. It is worth noting that in November, Pfizer had informed about signing an agreement with the U.S. government to supply 10 million treatment courses of PAXLOVID. The delivery will be completed in 2022. The FDA had also granted nod to Merck’s antiviral pill for Covid-19.

ETF Strategies to Follow

Here we discuss certain ETF strategies to help investors gain from optimism surrounding the easing Omicron variant concerns amid a recovering U.S. economy:

Play the Momentum ETFs

While the broader stock market is expected to gain on optimism surrounding the rebounding U.S. economy and accelerated distribution of coronavirus vaccine, momentum investing will likely take center stage as investors seek greater returns in the short term. Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Investors can consider iShares MSCI USA Momentum Factor ETF MTUM, Invesco DWA Momentum ETF PDP, Invesco S&P MidCap Momentum ETF (XMMO), VictoryShares USAA MSCI USA Value Momentum ETF (ULVM) and SPDR Russell 1000 Momentum (NYSE:ONEO) Focus ETF (ONEO) (read: Santa Arrives! High Beta & Momentum ETFs to Tap the Rally).

Growth ETFs to Ride the Optimism

The value trade has powered the stock bulls for most of this year. Investors have rotated back into growth-oriented market areas in recent weeks on optimism surrounding the economic recovery. In particular, big tech companies have rebounded strongly after being hit by inflation fears and lofty valuation concerns.

Given the bullishness, investors seeking to capitalize on the strong trends should consider growth ETFs. However, it is worth noting that these funds offer exposure to stocks with growth characteristics that have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility when compared to value stocks. Here, we highlight a few growth ETFs like Invesco Dynamic Large Cap Growth ETF PWB, SPDR Portfolio S&P 500 Growth ETF SPYG, iShares S&P 500 Growth ETF (IVW), Schwab U.S. Large-Cap Growth ETF (SCHG) and Vanguard S&P 500 Growth ETF (VOOG) (read: Bet on Growth ETFs to Ride the US Economic Growth Optimism).

Try ETFs From the Cyclical Sectors

The coronavirus vaccine rollout is gradually containing the spread of the outbreak across the globe. Accordingly, global demand and economic growth levels are on the mend from the pandemic-led slump. The optimism surrounding the gradual reopening of global economies and increasing demand are painting a rosy picture for the cyclical sectors.

Stocks within the cyclical sectors like industrial, financial, energy and consumer discretionary mostly move in tandem with the prevailing economic conditions. When growth returns to normalcy, these sectors automatically perform well. Cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge on a wealth effect, with a few more cyclical corners making the most of the rally.

Let’s look at some popular ETFs belonging to the cyclical sector that will benefit from the current scenario. These are The Industrial Select Sector SPDR Fund XLI, Energy Select Sector SPDR XLE, Fidelity MSCI Materials Index ETF (FMAT), Invesco KBW Bank ETF (KBWB) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) (read: Inflation to Stay Hot in Early 2022: ETF Strategies to Win).

Small-Cap ETFs to Watch Out For

As indicated by the Russell 2000 Index, small-cap stocks have been performing impressively so far in 2021. This upside is being mainly led by small-cap companies closely tied to the U.S. economy and are thus well-positioned to outperform when the economy improves. The latest economic data also indicates an improving economy. Therefore, investors can consider Schwab U.S. Small-Cap ETF SCHA, SPDR S&P 600 Small Cap ETF SLY, Vanguard S&P Small-Cap 600 ETF (VIOO) and John Hancock Multifactor Small Cap ETF (JHSC) (read: A Quick Guide to the 25 Cheapest ETFs).

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Energy Select Sector SPDR ETF (NYSE:XLE): ETF Research Reports

Industrial Select Sector SPDR ETF (NYSE:XLI): ETF Research Reports

iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports

SPDR S&P 600 Small Cap ETF (SLY): ETF Research Reports

Schwab U.S. SmallCap ETF (SCHA): ETF Research Reports

Invesco Dynamic Large Cap Growth ETF (PWB): ETF Research Reports

SPDR Portfolio S&P 500 Growth ETF (SPYG): ETF Research Reports

Invesco DWA Momentum ETF (PDP): ETF Research Reports

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