ETF winners and losers in Covid-19 vaccine rally

News of a successful coronavirus vaccine sent stocks flying, with value stocks hugely outperforming growth and tech stocks. 

Markets around the world rallied on the good news that Pfizer (NYSE:PFE) has potentially created a Covid-19 vaccine that is 90% effective. The two main indices in the US, the S&P 500 and Dow Jones Industrial Average, reached new record highs yesterday (9 November), while the FTSE 100 surged by 5%.

All this translated into strong ETF returns. The iShares Core S&P 500 ETF (LSE:CSP1) saw one-day gains of 3.28%, while the iShares FTSE 100 ETF (LSE: CUKX) returned 4.93% and the iShares FTSE 250 ETF (LSE: MIDD) 5.3%. Those with either the luck or the foresight to have bought the WisdomTree FTSE 100 3x Daily Leveraged ETP (LSE: 3UKL) would have seen a daily gain of almost 14.3%.

However, while markets in general experienced a boost, what is notable is the type of stocks that led the rally: value and cyclical stocks.

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Over the past decade or so, growth stocks have hugely outperformed value. This trend became even more entrenched during the pandemic, with tech stocks continuing to surge ahead.

However, with the expectation that the vaccine will allow economies to soon return to normal, the fortunes of value and cyclical stocks picked up, while the relative attractions of growth and tech shares have decreased. Tech shares were viewed as well placed to benefit from lockdowns and social distancing. Meanwhile, in a world of low or no economic growth, investors were prepared to pay higher multiples for the earnings growth that tech and other growth stocks were still able to produce.

This market rotation is reflected in ETF performance data. For example, the iShares S&P 500 ETF returned just over 3% yesterday. In contrast, the Xtrackers S&P 500 Equal Weight ETF (LSE: XDEW) returned just shy of 5%.

By allocating to each constituent in the index equally, this ETF had more exposure to value and cyclical stocks. Meanwhile, any ETF tracking the normal market-cap weighted S&P 500 would have had a much larger exposure to tech stocks.

The outperformance of value compared to growth can also be seen in ETFs tracking the Russell 1000 Growth and Russell 1000 Value indices. For example, on 9 November the Lyxor Russell 1000 Growth ETF (LSE: RSGL) saw a return of 1.23%. Meanwhile, the Lyxor Russell 1000 Value ETF (LSE:RSVL) surged by 5.54%. The Russell 1000 growth ETF subsequently saw a much larger decline in the first few hours of markets opening in London on 10 November, reflecting larger declines that took place overnight in the US when UK markets were closed.

The SPDR MSCI USA Value ETF (LSE: UVAL) also experienced strong performance, returning 4.53%.

Another way to look at this is to compare the performance of the tech-heavy Nasdaq index to the more traditional Dow Jones Industrial Average. As commentators have pointed out, yesterday the Dow Jones outperformed the Nasdaq by the widest margin since the bursting of the internet bubble in 2000.

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This was somewhat reflected in ETF performance. Measured from market open to close on 9 November in the UK, the iShares Dow Jones Industrial Average ETF USD (LSE: CIND) returned 3.9%, while the Invesco EQQQ Nasdaq-100 ETF (LSE: EQQQ) gained just 1.41% during yesterday’s trading. Moreover, EQQQ saw a much larger decline when trading in London opened on 10 November.

The return of value and cyclical stocks was also demonstrated in the relative outperformance of small caps. The SPDR Russell 2000 US Small Cap ETF (LSE: R2SC), for instance, returned 5.07%.  

News of the vaccine also appears to have diminished the attractiveness of gold. The iShares Physical Gold ETC (SGLN), for example, lost 4.82%. Gold is attractive to investors at times of heightened risk. It also increases in attractiveness when bond yields are at zero or negative. With an end to the pandemic potentially in sight, both rationales for holding gold may fade.  

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.