Index ETFs Are Slumping, But Targeting a Positive Week | ETF Trends

Stocks slumped from fresh highs on Friday as lawmakers hastened to iron out differences over new coronavirus stimulus measures.

The Dow Jones Industrial Average lost about 0.4%, while the S&P 500 slipped a similar amount. Meanwhile the Nasdaq Composite traded 0.1% lower, attempting to stay near breakeven. All three benchmarks tagged fresh intraday highs in morning trading after closing at records in the prior session.

Key stock index ETFs such as the SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all losing steam Friday, following record high trading on Thursday.

While the coronavirus stimulus negotiations have been dragging on for months, leaders in Washington are coming up against the deadline this Saturday night. Lawmakers claim they are approaching an agreement that would provide $900 billion in additional aid, but much still remains uncertain.

Past negotiations have derailed, but Senate Majority Leader Mitch McConnell, stated Friday that the discussions “remain productive.” “In fact, I am even more optimistic now than I was last night that a bipartisan, bicameral framework for a major rescue package is very close at hand,” he added.

There is still uncertainty over how the stimulus will play out however as disagreements continue over whether or not to eliminate liability protections for businesses or aid to state and local governments.

Tesla’s S&P 500 Entry

The stock market is projecting enormous volume on Friday amid electric automaker Tesla’s entry into the S&P 500 at Friday’s close. There is likely to be a flurry of activity into the close. The S&P 500 will commence trading with Tesla on board starting Monday. The stock is up 4% amid the excitement, and the Global X Autonomous & Electric Vehicles ETF (DRIV) is gaining slightly on the day as well.

With a market capitalization of more than $600 billion after a 700% rally this year, Tesla is being added to the benchmark all at once, generating the most significant rebalancing of the S&P 500 in history, where it’s projected that passive funds tracking the S&P 500 will be required to purchase over $85 billion of Tesla, while selling $85 billion of the rest of the index to compensate.

Several major exchange-traded funds like the Invesco QQQ Trust (QQQ), which mirrors the Nasdaq 100, will be rebalanced alongside the S&P 500 Friday.

Another quarterly event, quadruple switching, when options and futures on indexes and equities expire, is also fueling volumes and affecting price action. Friday widely anticipated to be one of the most hectic trading days of 2020 as a result.

Despite losses on Friday, the benchmark stock averages are looking to notch marginal gains for the week, with the S&P 500 gaining 1.6% this week through Thursday’s close, and targeting for its fourth positive week in five, while the Nasdaq generated even greater gains, with a 3.1% rally for the week so far. The move higher was fueled by stimulus optimism and a vaccine rollout.

While investors appraise the likelihood of impending stimulus, coronavirus cases continue to increase at a quickening pace. Based on a seven-day averages from Johns Hopkins University data,  the U.S. is recording at least 215,729 additional coronavirus infections cases each day, including over 247,000 new infections on Wednesday alone.

“The bad news this week is that the third wave continues to get worse, and the economic damage from the pandemic continues to mount,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “The good news is that policy is starting to succeed in containing the virus, and the federal government will likely pass a stimulus bill, mitigating both major risk factors.”

McMillan said the spike in cases could generate more volatility in the short term, but that the economy should see additional gains in 2021. “With vaccines now available and ramping up, we are at the end of the beginning of the pandemic, and markets recognize that,” he added.

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