Market Overview

How The Coronavirus Has Impacted Index Funds

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How The Coronavirus Has Impacted Index Funds

By Kris Lamey

So far, the first half of 2020 has been widely defined by the Coronavirus, from the way we live our daily lives to the impacts on the wider economy and markets. As schools, businesses and entertainment venues closed, millions of workers filed for unemployment and index funds have reflected the country's growing uncertainty.

Funds tied to the performance of the Dow Jones Industrial Average, the Standard and Poor's 500 and other indexes reflect the uncertainty of the market as a whole. This has left investors looking for a safe place to put new and existing assets to ride out the tide and hopefully grow their wealth.

A review of COVID-19's impacts on index and exchanged-traded funds thus far this year can help investors decide where to invest their money safely to guard against future impacts of the global pandemic.

Coronavirus Impact on Stocks in Q1

In the first three months of the year, the stock market included highs and lows, as traders panicked and flooded the exchanges. The circuit-breakers designed to curb panic trades kicked in four times in March alone. When triggered, the circuit-breakers halt all trades for 15 minutes to help the market right itself.

To put this into perspective, the Securities and Exchange Commission required the circuit-breakers following the 1987 market crash when the DJIA fell 22.6%. However, the market-wide break has only taken effect once since 1997 — prior to the March market madness.

The S&P 500 triggered the 15-minute break on March 9, 12, 16 and 18 when the index dropped 7% below closing from the previous day. Further, the Dow and the Nasdaq also trigger a circuit-breaker when the S&P 500 does.

To sum it up from another standpoint, the pandemic unleashed such uncertainty that two of the largest same-day drops in the DJIA happened in March 2020.

Stimulus Package Boost Index Funds

While the market continued to be shaky, good news in the form of a $2 trillion stimulus package boosted the Dow 11.4% in late March, while the S&P 500 picked up 9.4% and the Nasdaq rose 8.1%. Some of those gains came and went but gave hope to beleaguered investors.

Search for a Vaccine Rallies Index Funds

In mid-May 2020, biotech firm Moderna reported that a COVID-19 vaccine it produced shows signs of effectiveness. This encouraged the company to move to larger trials. Also in May, Federal Reserve chair Jerome Powell expressed confidence that he could further support the US economy.

However, Powell indicated that the U.S. economy could shrink another 20-30% in the second quarter of 2020 prior to recovering as the economy re-opens.

Index Fund Strategies to Consider During the Pandemic

Consider investing in index funds sensitive to the current environment. Smart fund managers are including assets that continue to do well because they are critical to the treatment and prevention of COVID-19.

Note that your own tolerance for risk should guide your investment decisions. Below, we look at general areas that may continue to show growth without recommending specific funds, ETFs or stocks. Speaking with a financial advisor or doing an assessment with a robo-advisor could be wise more before you start day trading even a $1 in index funds. In a volatile market you have to be willing to weather the ups and downs of index funds.

Companies Working on COVID-19 Solutions

Corporations working to help defeat COVID-19 include biotechnology anchor companies working to find a viable drug to become the new standard of care for COVID-19. This is a specialized sector, but you can look for medical news and approval for large-scale testing of likely drugs that can help people recover faster or alleviate the severe symptoms of the disease. If one of the drugs developed by a company in your portfolio proves safe and effective, the corresponding rise in value may help you recover from other losses.

Companies Developing Testing Kits

Although the number of available kits has increased, there's still a shortage of COVID-19 tests around the world. Many companies are ramping up their capacity to distribute as many tests as possible. At the same time, antibody tests ordered online tell people whether they've come into contact with the novel coronavirus.

Cleaning and Sanitation Products

According to Statista, the sale of aerosol cleaning products rose 400% in early March. Other categories also showed tremendous growth as the world prepared to hunker down and sanitize and sanitize again. Some savvy investors may want to invest in diversified funds that have rebalanced their offerings to account for this trend.

This is a great way to boost your return on investment thanks to sharp increases in the sales of hand sanitizers, bleach and disinfectant wipes. Effective cleaning procedures are the top defense against the spread of COVID-19 in hospitals and institutions where large numbers of people still risk exposure to the virus, according to the CDC. The corresponding increase in sales of these products could continue for the foreseeable future.

Bulk Sales Clubs

Many people have turned to ordering most of their groceries online to maintain shelter-in-place and social-distancing protocols. Others are buying products in bulk to avoid shortages and additional trips to the store. In some cities, big box stores are the only places still open to stock up on groceries and other necessities.

Discount clubs have also increased their sales as people who can no longer eat out as often prepare a weekly menu of home-cooked meals. Businesses catering to these needs have provided a lifeline to hungry customers, and index funds including them can provide a lifeline to flagging investment portfolios. Discuss your favorite bulk product club with your financial advisor to see if it's an untapped opportunity that meets your investment needs.

In-store and Online Ordering Heydays

In April, grocery store hiring trends rose 12% year over year, indicating increased sales due to customers stocking up and cooking more at home. Amazon reported $75.5 billion in Q1 sales, up 26% year over year. However, the online giant saw a 29% drop in profits due to costs associated with ramping up their operations to deal with new customer demand and new procedures designed to curb the spread of the coronavirus.

When considering what index funds to invest in, carefully consider these trends and how long they might last.

Will Index Funds Continue to Postpone Rebalancing?

The companies that make up the S&P 500 change automatically in response to corporate profitability or shortfalls. The volatility of the global pandemic may impact this rebalancing significantly, unless S&P Dow Jones Indices, the parent company of the S&P 500, postpones the rebalancing. ETFs and other funds based on the index are also supposed to rebalance their portfolios in response to S&P 500 changes. However, many are holding off. A robo-advisor or financial advisor will handle rebalancing for you and may even provide tax loss harvesting to allow you deduct losses from your income tax.

This is both good and bad news since postponing fund rebalance could result in more stable or more volatile performance, depending on how things go for the included companies.

In mid-March, the S&P 500 postponed the quarterly rebalancing due to the record-breaking invocations of the circuit-breaker and widespread panic in the markets. This is definitely something to watch and consider when it comes to making ETF and index fund decisions.

Investing and Risk Tolerance

Your investment decisions should always come after careful consideration of the pros and cons of each opportunity. Take your risk tolerance into account when you employ different strategies. This is a key consideration when rebalancing your index fund portfolio in response to the coronavirus.

Kris Lamey is a corporate finance executive with more than 20 years of experience. After completing her MBA, she pursued a career in real estate investing and currently specializes in freelance writing in the financial sector.

 

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