Coronavirus Pandemic – Using Vaccine ETF as an Investment Vehicle

 

(Click on the image to enlarge)

An Exchange Traded Fund (ETF) is an excellent investment vehicle for those who are risk-averse to individual stocks and are uncomfortable with mutual funds' restrictions.  

In 2020, as the pandemic became frightening, many Bio/Pharma ETFs changed their primary holding to focus on the pandemic. In the process, broadly, two distinct groups emerged, wherein one focused on the development of vaccines, while the other concentrated on the treatment and administration. While they are not mutually exclusive, their primary holdings, however, are reasonably different. For example, the PPH ETF comprises the major vaccine development companies like AstraZeneca, Pfizer, J & J, Eli Lilly, Merck, Sanofi, etc. primarily, while the BBH ETF focuses on treatment providers and momentum stocks like Amgen, Biogen, Gilead, Regeneron, Moderna, etc. 

Since vaccine development is a medium-to-long-term venture, the development ETFs hardly took off this year, whereas the treatment and momentum ETFs produced some standout returns. The above two graphs representing the two sub-sectors convincingly prove the point: PTH has returned 52% while PPH has been hovering on the negative-return zone.

(Click on the image to enlarge)

Due to the similarity of primary holdings, the development ETFs share high positive correlations among themselves but much lesser correlations with the treatment and momentum ETFs. Conversely, the treatment and momentum ETFs share a high degree of correlations among themselves, while much lesser correlations with the development sub-group. 

BBH, a treatment and momentum ETF, shares very high correlations of 0.9873, 0.9031, and 0.9474, respectively, with the other three ETFs in the same sub-group, namely IBB, PTH, and XB, but significantly lower correlations with the development ETFs. On the other hand, XPH, a development ETF, shares very high correlations with its counterparts in the sub-group and much lower correlations with the other sub-group.

Therefore, one needs to pick a complementary combination of ETFs to play the Covid-19 vaccine arena effectively.

Data Source: Yahoo Finance

Disclaimer: The author is not advocating any of the ETFs/stocks listed here. Consult your Registered Rep, RIA, or Financial Planner for an appropriate asset allocation model and the suitability of stocks and other holdings for you.

Stay safe!

-Sid Som

homequant@gmail.com