Much has been written about the impact of Covid-19 on market behaviour and market psychology. The way investors perceive valuations is seen through the lens of Covid-19 because the virus has changed human behaviour and human behaviour impacts markets. For instance, tech stocks moved markedly higher last year regardless of valuation, because technology became the primary method of communication during lockdowns. Tech stocks buoyed market indices such as the Dow Jones Industrial Average, the S&P500 and the Nasdaq Composite and Nasdaq 100 Indices, driving them to all-time highs.
How have the stocks directly linked to Covid-19 performed and what are they? How can investors get the best exposure to Covid-19? In the investing world, the most sensitive industry to the effects of Covid-19 is the biotechnology industry — particularly the Covid-19 vaccine industry. To investors, the efforts to combat Covid-19 can be simplified into a value chain. This Covid-19 value chain can be segmented based on three categories of companies: Diagnostics, therapeutics and vaccine companies.
Vaccine companies are usually in the spotlight based on the efficacy of their therapeutics and vaccines. Companies that produce vaccines that work will likely see an exorbitant surge in value in a short period of time. Progress on the development of the vaccine — usually announced during key milestones such as Phase Three testing — will likely see a similar effect on the stock prices of these companies which are listed. Ideally, investors would want to invest in the “winning” vaccine companies, but putting all the eggs in one basket can be very risky because many of these vaccine-related companies have high volatility, which can result in significant losses. A strategic option would be to invest in an exchange traded fund (ETF) with exposure to vaccine-related stocks. Risk is diversified and returns are much likely to be higher on average.
The case to buy a vaccine ETF is strong because firstly, buying a single vaccine stock will be very sensitive to Covid-19 and hence subjected to persistent fluctuations while exposing the investor to significant risk. Secondly, the movement of these stocks is very news-dependent, where a hint of the positive development of a vaccine can cause share prices of related companies to surge, and the opposite to happen if the development of vaccines is hindered. This means investors need to keep their eyes peeled if they have invested money in a single stock, and need to be able to react in a prompt manner to lock in gains or cut losses due to significant volatility. With ETFs that cover a basket of biotechnology stocks and vaccine-related companies, investors need not worry about losing out on a potential surge of a particular stock or suffering heavy losses to their portfolio.
Vaccines generally take a long time to be approved by relevant authorities for commercialisation. For Covid-19 vaccines, to date, there are two vaccines that are approved for full use; and eight vaccines in early or limited use. Moderna, Pfizer, BioNTech, AstraZeneca, CanSino Biologics, Novavax, Johnson & Johnson and SinoPharm are public-listed companies that look promising based on their vaccine generation development progress. Some of these standout companies have seen strong surges in their share price, as shown in Table 1. The average returns for these eight stocks since the March 2020 lows is a significant 220.3%, dwarfing the S&P500’s 72.7% returns over the same period. In fact, only two stocks in this portfolio of eight stocks have higher returns than average, which means most investors who invested in a single stock are less likely to outperform the average performance of this portfolio of stocks. Diversification is key for picking vaccine stocks for the highest returns per unit of risk. Owning an ETF with exposure to these stocks allows this objective to be achieved.
It is important to note that most of the companies in Table 1 also have other segments in their business apart from vaccine development. This is important because in the case of any unsuccessful vaccine development, the company still has a business and a portfolio of drugs and therapeutics to fall back on. This reduces risk to the investor and by owning a biotech ETF with exposure to vaccine development stocks, this risk can further be reduced while still giving investors healthy returns. Table 2 shows the top three ETFs with holdings (in terms of percentage allocation) of each of the eight companies with the exception of SinoPharm and CanSino Biologics as they can be found in general ETFs as opposed to a thematic biotech ETF. All the ETFs are listed in the US, on the NYSE Arca exchange, Chicago Board Options Exchange or Nasdaq exchange.
The three-month returns of these ETFs are shown in the Table 3. The benchmark S&P500’s returns for the three-month period is 9.6% while Nasdaq’s return for this period is 11.8%. The average return for these 10 ETFs is 13.9%, much higher than both benchmarks. It is important to note that a lot of these vaccine stocks have gained in value, and hence have a higher weightage for market cap-based indices such as the S&P500. Given the possibility that successful vaccines will eventually be commercialised, along with more vaccine developments in the pipeline, ETFs are a safer bet when tapping into the rally of vaccinerelated stocks.
