By Salvatore J. Bruno, Chief Investment Officer, Managing Director, IndexIQ
Just like that, it seems, we’re in a new reality, one in which there’s not just one, not two but three highly effective vaccines for limiting the spread of COVID-19 and saving lives.
Pharmaceutical companies Pfizer (with partner BioNTech), Moderna, and now Astra-Oxford have all announced trial results that showed better than 90% efficacy for their vaccines. Pfizer and Moderna have already applied for emergency approval from the US Food & Drug Administration, leaving open the possibility that the drugs will be available in limited quantities by the end of the year, with wider distribution in the first and second quarters of 2021. As a result, investors may be witnessing the beginning of the unwinding of the COVID-19 trade (even as we see the number of cases spike going into year-end).
This shift can be seen clearly in the relative performance of a number of Exchange-Traded Funds (ETFs). For example, one ETF that is long online retail while shorting brick & mortar stores saw a single-day decline of -8% on November 9th in the wake of the Pfizer announcement. Another ETF that provides long exposure to energy was up 16% that same day on the premise that stronger economic growth would be good for oil demand. The abrupt rotation into value and away from growth was also reflected in the ETF world, with value up and growth down, at least temporarily. (Source: Bloomberg, November 9, 2020)
Finally, the ground has moved a little under inflation strategies put in place in anticipation that the Federal Reserve would remain committed to near-zero interest rates. The speculation: if economic growth returns, can the Fed be less accommodating? The prospect that higher rates might dampen inflation seemed to cause some investors to reconsider their positions, something that was seen in the price action of those asset classes that have traditionally served as hedges against rising prices. For example, an ETF investing in gold miners saw a price decline of -6.0% on November 9th, while another focused on 20-year+ Treasuries also dropped. Another ETF focused on Treasury inflation-protected securities (TIPS) also fell. (Source: Bloomberg, November 9, 2020)