ETFs tracking oil, air travel and retail are soaring as investors pile into stocks tied to the reopening of the economy

Alaska Airlines, American Airlines, and Delta Air Lines at LAX
Alaska Airlines, American Airlines, and Delta Air Lines aircraft at Los Angeles International Airport.

  • As the US economy opens up, investors have been piling into stocks tied to hopes of renewed growth and consumer spending.
  • “ETFs are an instant global diversification to many different companies from around that industry,” Andrew Chanin, CEO of ProcureAM, told Insider.
  • Year-to-date, some ETFs tied to oil, air travel and retail have seen record highs.
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Vaccine distribution is priming the economy for a reopening later this year, and the pace so far has been faster than officials expected. Optimism is growing and investors have been piling into stocks that were beaten down by the pandemic but are now set to thrive as economic activity restarts. Investors are finding ETFs to be a solid bet on a range of reopening plays, sending some funds soaring year-to-date in 2021.

“ETFs are an instant global diversification to many different companies from around that industry,” Andrew Chanin, CEO and co-Founder of ProcureAM, told Insider. Chanin is behind UFO, an ETF focused on space exploration launched in 2019. UFO, he said, is “for investors looking to get access to the space economy and don’t want to settle or just pick a couple of names.”

Year-to-date, ETFs tracking oil, air travel, and retail are soaring, thanks to the value stocks – typically well-established companies that are often undervalued and have lower price-to-earnings ratios – in their holdings that could appreciate with a burst of new economic activity.

Cyclical industries are usually attuned to various business cycles. Revenues are higher when there is economic growth and lower in times of contraction.

Andrew Slimmon, managing director and senior portfolio manager at Morgan Stanley Investment Management, in a recent note said he is “extremely bullish” on value stocks, especially after the Federal Reserve’s decision to keep its policy in place until the US economy rebounds last week.

Here are three ETFs that are benefitting from investor sentiment around the economic reopening:

1. USO

The United States Oil Fund primarily invests in listed crude oil futures contracts and other oil-related contracts. The ETF, which debuted in 2006, may also invest in forwards and swap contracts.

The roughly $3 billion fund has gained 26% year-to-date.

Oil prices have soared since mid-February due to outages in Texas from the freezing temperatures. Refineries have taken a while to bounce back from the historic blast of winter weather, causing inventories to drop. Still, a summer rally may be in store for the oil ETF amid a tighter market.

Bank of America in February said Brent Crude prices could hit $70 a barrel in the second quarter of 2021. This year, it could average $60, the bank said, raising its average price outlook by $10 a barrel.

2. JETS

The US Global Jets ETF invests in the global airline industry, which includes airline operators and manufacturers around the world.

Launched in 2015, the roughly $11.5 billion fund has gained 25% year-to-date.

The index utilizes a tiered weighting scheme driven by market capitalization and passenger load. 70% of its weight is in US large-cap passenger airlines with the top four companies receiving 10% each. The next five largest US or Canadian airlines each receive a 4% weighting.

United Airlines and American Airlines are the ETF’s biggest holding both at 11% each, followed by Southwest Airlines and Delta Airlines at roughly 10% each. Alaska Air Group takes up 4%

The airline industry was among those that suffered the most when large swaths of the global economy shut down, halting travel in nearly every part of the world for some time. Optimism is gaining, however, when the Transportation Security Administration in mid-March revealed that air travel spiked to its highest level in nearly a year.

3. XRT

The SPDR S&P Retail ETF primarily invests in the US retail industry from apparel, automotive, computer and electronic, to department stores, general merchandise stores, and internet and direct marketing, among others.

The roughly $635 million fund has gained 42% year-to-date.

The top sectors it focuses on are internet and direct marketing at 21.5%, followed by automotive and retail at 18% each.

Holdings include Hibbett Sports, Wayfair, Best Buy, eBay, Murphy USA, Revolve Group, Magnite, Dick’s Sporting Goods, Albertsons companies, and Target, all weighing a little over 1% each.

As the economy rebounds from pandemic lows, the retail sector is making a strong comeback, driven by the pent-up consumer demand. Retail sales, according to the National Retail Federation, are expected to grow between 6.5% and 8.2% this year to more than $4.33 trillion in sales.

Many of the retail companies have also invested in enhancing their online presence to catch up on the e-commerce trend that many experts say is here to stay.

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GameStop slump and weak February sales data are pressuring a major retail ETF

GameStop
At a GameStop store in North Las Vegas.

  • GameStop on Tuesday was on course for a second straight loss, down as much as 20% during the session.
  • The video game retailer is the largest holding in the SPDR S&P Retail ETF.
  • The ETF was down after February retail sales fell by more than expected, with poor weather a big factor.
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GameStop shares fell by more than 20% during Tuesday’s session. The move lower came alongside a slump in monthly US retail sales and putting pressure on a widely watched retail exchange-traded fund.

GameStop shares were on track for a second straight loss, though shares staged a recovery in the afternoon following a steep decline in early trading. The stock fell by as much as 22% to an intraday low of $172.35.

The video game seller was down alongside other retail stocks after the Commerce Department said early Tuesday retail sales fell by 3% in February. That result was worse than the 0.5% decline expected in a Bloomberg survey of economists.

GameStop is the top holding in the SPDR S&P Retail ETF with a weighting of about 12.4% as of Monday. The ETF, which had about $855 million in assets under management, on Tuesday fell as much as 3.6% to 90.08 before trimming the loss of 2.3%. Among the ETF’s other holdings, Signet Jewelers fell 1.2%, Kohl’s sagged by 2.5% and Rent-A-Center fell 4.1%. Best Buy, meanwhile, edged up 0.2%.

Sales in the electronics and appliances category in February fell by 1.9% month-over-month and on a seasonally adjusted basis. But analysts largely pointed to poor weather as a key reason that February retail sales declined. The loss also came after an upwardly revised increase in January sales.

The US government last week starting sending stimulus checks of $1,400 to most Americans as part of its coronavirus-relief package. That money “will lift disposable income by roughly 25% month-over-month in March, creating a massive tailwind for consumer demand,” Aneta Markowska, chief economist at Jefferies, in a note Tuesday.

Other analysts have said GameStop should benefit from customers having extra funds for discretionary items.

GameStop, the darling of retail investors active on Reddit’s Wall Street Bets community, earlier this month said Ryan Cohen will be in charge of a new committee aimed at driving a turnaround plan.

Cohen is the cofounder of pet products retailer Chewy and GameStop’s largest individual shareholder.

Read the original article on Business Insider