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ETF Strategies to Gain From Vaccine Progress, M&A Deals

Sweta Jaiswal, FRM

The optimism surrounding the progress in the coronavirus vaccine development and several corporate M&A deals seems to be supporting the Wall Street rally since a couple of days. Let’s look at these driving factors in detail:

M&A Activities on a Roll

ByteDance, TikTok’s Chinese owner, selected Oracle (ORCL) to be its technology partner in the United States. Notably, Oracle is expected to assume management control of TikTok’s U.S. user data, per a Reuters article. Moreover, the software giant is negotiating to acquire a stake in TikTok’s U.S. operations, according to the same report.

Gilead Sciences, Inc. (GILD) announced that it will purchase the oncology company Immunomedics (IMMU) for a deal consideration of $88 per share in cash or approximately $21 billion. Per the terms of the merger agreement, a wholly-owned subsidiary of Gilead will immediately commence a tender offer to buy all the outstanding shares of Immunomedics’ common stock. The transaction worth a price of $88 per share represents a 108% premium to Immunomedics’ closing price on Sep 11, 2020. 

Notably, Nvidia (NVDA) agreed to acquire the UK-based chip designer Arm Ltd from Japan's SoftBank Group Corp for as much as $40 billion after weeks of speculation. It will mark the biggest acquisition in the history of the semiconductor industry. Per the terms of the deal, Nvidia will pay SoftBank $12 billion in cash including $2 billion payable at the time of signing the agreement and 44.3 million Nvidia shares at an estimated value of $21.5 billion.

Encouraging Vaccine Progress

Investors heave a sigh of relief as AstraZeneca (AZN) resumed its late-stage studies on its coronavirus vaccine candidate AZD1222, which is being developed in partnership with Oxford University. The company recently put a hold on its global trials including the late-stage analyses to allow an independent data committee to review the safety data. Some unexplained illness observed in a study participant was the reason behind this decision.

Notably, the company is one of the three vaccine developers to begin the Phase 3 trials, which were being conducted in the United States, Britain, Brazil and South Africa. AstraZeneca’s COVID-19 vaccine candidate is probably the most advanced in terms of development and is being viewed as one of the first candidates to reach the market.

Pfizer (PFE) in collaboration with German biotech firm BioNTech also started its late-stage study on coronavirus vaccine. The trial comprises around 30,000 participants and will be conducted at nearly 120 sites globally. Meanwhile, Pfizer recently applied to the FDA to expand the late-stage trial enrolment strength to to 44,000 participants from 30,000 stated previously. Moving on, the company’s CEO Albert Bourla said that Americans could receive the vaccine before 2020-end if its safety and efficacy are proven successfully, per a CNBC article. Going by the same report, the company is expecting to receive key data from the late-stage trials by the end of October.

Other Factors Raising Optimism

A slew of encouraging updates indicating that the U.S. economy is gradually returning to the pre-pandemic level is instilling investors’ confidence in the stocks. In fact, the latest employment statistics, which showed that the economy added 1.4 million jobs in August and the unemployment rate dropped to 8.4% from 10.2%, is an indication of an improving economy. Encouragingly, about half the jobs that were lost during the pandemic have been recovered to date.

The third quarter of 2020 already witnessed the rise in U.S. manufacturing activity to nearly a two-year high in August owing to solid new orders. Per the Institute for Supply Management’s (ISM) Sep 1 statement, the index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. Economists polled by Reuters forecast an increase in the index to 54.5 in August.

Moreover, the Commerce Department recently reported that new orders for U.S. manufactured goods surged for the third consecutive month in July by 6.4%. The uptick in July not only surpassed the consensus estimate of 5.6% but also matched the upwardly revised spike in June.

Also, considering the Fed support and pinning hopes on a further stimulus from the Congress, the industrial sector is expected to fare well in the near term. Moreover, the central bank recently announced a new strategy to revive the employment scenario to its pre-COVID levels in the United States and drive inflation to a decent degree.

ETF Strategies to Follow

Here we discus certain ETF strategies to help investors make the most of the current market optimism.

Momentum ETFs

While the broader stock market is expected to gain on optimism surrounding the reopening of U.S. economy and positive developments in coronavirus vaccine research, 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 displayed an uptrend over the past few weeks or months. Investors can consider iShares Edge 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 Focus ETF (ONEO) (read: Bet on These Momentum & High-Beta ETFs on Treatment Hopes).

Growth ETFs

Growth stocks are likely to witness a positive revenue and earnings trend at a faster rate than the industry average. As such, growth funds tend to outperform during an upturn. While there are plenty of options in the growth ETF world, we highlighted five funds that offer broad-based exposure to the U.S. stock market like Vanguard Growth ETF VUG, Schwab U.S. Large-Cap Growth ETF SCHG, iShares Core S&P U.S. Growth ETF IUSG, SPDR S&P 500 Growth ETF (SPYG) and Vanguard Mega Cap Growth ETF (MGK) (read: Key ETF Areas to Track as Biden Victory Looks Quite Likely).

Large-Cap ETFs

The current investment scenario with the U.S. economy gradually picking up along with massive government and Fed reliefs makes sense for investors to bet on the large-cap ETFs as these funds perform well in such scenarios. Therefore, investors can consider SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV, Vanguard S&P 500 ETF VOO, Schwab U.S. Large-Cap ETF (SCHX), iShares Russell Top 200 ETF (IWL), Vanguard Mega Cap ETF (MGC), Vanguard Mega Cap Growth ETF (MGK) and Multifactor Large Cap ETF (JHML).

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SPDR SP 500 ETF (SPY): ETF Research Reports
iShares Core SP 500 ETF (IVV): ETF Research Reports
Vanguard SP 500 ETF (VOO): ETF Research Reports
iShares Core SP U.S. Growth ETF (IUSG): ETF Research Reports
Vanguard Growth ETF (VUG): ETF Research Reports
Invesco DWA Momentum ETF (PDP): ETF Research Reports
iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports
Schwab U.S. LargeCap Growth ETF (SCHG): ETF Research Reports
Invesco SP MidCap Momentum ETF (XMMO): ETF Research Reports
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