“Market rotation” doesn’t usually mean “whirlwind,” but that’s how the past week has felt: up markets one day, down the next, and back again. We covered the best day for financials since July, and, one day later, a complete reversal. There were signs of broadening support: timber and paper ETFs outperformed, and industrials continued their slow steady climb . And there were signs of innovation that’s bigger than the COVID cycle: Space-related ETFs had a great day Monday as Virgin Galactic shares jumped about 20%.
Looking back on the quarter, as we do in the gainers/losers section at the bottom of this note, is a study in energy contrasts. Clean energy funds were the top three biggest winners, while fossil-fuel funds swept the bottom five.
A fund that launched in 2019 is having a terrific 2020. The Hoya Capital Housing ETF /zigman2/quotes/203278229/composite HOMZ +1.30% initially branded itself as the only ETF to cover the entire housing market ecosystem, from builders to realtors to REITs and Home Depot. But it was struggling to gather assets, so in August, the fund’s founder, Alex Pettee, rebranded it to more directly compete with the two better-known “homebuilder” ETFs, the SPDR S&P Homebuilders ETF /zigman2/quotes/202739297/composite XHB +1.44% and the iShares U.S. Home Construction ETF /zigman2/quotes/203468436/composite ITB +1.18% , both of which are also laden with stocks that aren’t homebuilders.
“The real estate category is much more crowded and people are there for yield,” Pettee told MarketWatch. “We were the third-best performing real estate fund out of 50 but we were one of the lowest-yielding. We kind of realized that it’s better to be the weakest performer, for the time being, in the homebuilder group, but to be one of three.”
And this year, he added, “we’ve really benefitted from the good housing story.”
Being the “weakest link” right now means that instead of the 24-29% returns of its competitors over the past three months, HOMZ has returned 15%. HOMZ’ more diversified approach – about 60% of the portfolio is allocated to builders, 35% to residential REITs and about 5% to real estate technology companies like Zillow /zigman2/quotes/205077794/composite ZG +4.69% , Redfin /zigman2/quotes/203726414/composite RDFN +5.05% , and Realogy /zigman2/quotes/201151464/composite RLGY +3.78% – will serve investors better over the longer term, Pettee argues.
“We feel having the rental side is a critical piece to the total housing puzzle,” he said. “There is going to be a time when the builders are not up 40-50% and it’s a more normal market.” And the “prop-tech” companies stand to benefit from a once-in-a-lifetime disruption of one of the most antiquated industries, he believes.
“There is a case to be made that without Zillow and online shopping for homes, the housing market wouldn’t have done well in the pandemic,” Pettee said. “This has really pulled forward the online home shopping experience.”
Perversely, the housing market’s good fortune has comes thanks to the pandemic. With so many people newly working from home, demand for homes – better homes, bigger homes, homes with different amenities – has boomed.
But it’s not just structures that stand to benefit. Savvy ETF issuers realized almost immediately that remote communications, cloud computing, and cyber security technologies would all be in hot demand. In June, Direxion launched the fund with the million-dollar ticker, WFH, which MarketWatch covered at the time.
But there are other ways to play the theme, notes Todd Rosenbluth, CFRA head of mutual fund and ETF research. WFH does a good job of aggregating the themes noted above, but several ETFs break them out. In the cloud computing category, Rosenbluth suggests investors look at the WisdomTree Cloud Computing Fund /zigman2/quotes/214057201/composite WCLD +3.66% , the Global X Cloud Computing ETF /zigman2/quotes/211334933/composite CLOU +2.49% , or the First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY +2.89% . In the cyber-security category, he suggests First Trust’s NASDAQ Cybersecurity ETF /zigman2/quotes/200078153/composite CIBR +2.57% or Global X’s fund /zigman2/quotes/214899428/composite BUG +3.20% .
And on Thursday, industry behemoth iShares launched a Virtual Work and Life Multisector ETF /zigman2/quotes/221459572/composite IWFH +2.53% (NYSE:IWFH).
While it’s always hard to pick the winners and losers – WCLD is up a whopping 67% in the year to date, while CLOU has gained 51% and SKYY 30% – Rosenbluth thinks investors should consider the overall theme one that’s here for the long haul.
“For the foreseeable future, more people will be working from home and will need the technology and services that make them more productive and keep them connected,” he said in an interview.
“The re-opening has not been smooth. The fact that many companies and employees have demonstrated that they are productive at home means it’s likely that we won’t see a full return to the office for some time.”