My Top 5 SPDR Picks for 2021 and Beyond

Since Pfizer Inc. (NYSE: PFE) and Moderna Inc. (NASDAQ: MRNA) released their COVID-19 vaccine news, the S&P 500 is up nicely, hitting an all-time closing high for this bellwether index.

With effective vaccines on the horizon, that the first patients could very well start to get next month, well…This is what a race to the finish line looks like.

The market loves it; heck, everyone loves it.

But not everyone has caught on yet; I guess there are some folks who haven’t heard the phrase “pent-up demand.”

There are still some stocks under pressure.

That gives us one of the all-time great opportunities to “get out in front” of some truly extreme value…

Where to Look for Monster Rallies Next Year

When you really think about it, after so much COVID-19-related economic damage, plenty of stocks have nowhere to go but up.

Some sectors have been muted but should respond positively once the medical and economic recovery gets underway.

Energy is a textbook example – the sector hit the hardest by COVID-19. The sector is down 39.86% year to date; this chart shows the sheer size of the carnage.

The good news is, as the world makes the long trip back to normality, energy consumption will, at a minimum, return to levels that we’ve seen in the past. It’s very likely to go even higher.

The recent vaccine news has propped up the sector as investors’ enthusiasm for energy stocks returns. I think this sector has huge growth potential in the coming months; economies will start to come back online, people who haven’t been able to will want to travel – whether that be by car or plane – once it’s safe to do so.

The Select Sector SPDR Trust Energy ETF (NYSEArca: XLE) has been channeling since June. This sector is rich with great companies, but I want to look at two of the top-performing stocks in this sector over the past three months – Baker Hughes Co. (NYSE: BKR) and Devon Energy Corp. (NYSE: DVN).

Baker Hughes is an oil and gas company – the stock is up from its 52-week low of $9.12 and is currently trading at $19.20. Devon Energy focuses on hydrocarbon exploration. It’s also up from its 52-week low of $4.70, trading at $13.56. I like both of these companies because they’re up from their yearly lows and they still have room to run. Either of these stocks or the ETF are great picks for some long-term gains, or long-term equity anticipation securities (LEAPS) trades expiring in the second, third, or fourth quarters of 2021.

The healthcare sector has been strong year to date with the United States on par to spend 20% of its GDP in this sector. This growth is expected to continue, especially with the widespread availability of a vaccine by 2021. COVID-19-related revenue along with a pent-up demand for elective procedures, an aging global population, and a growing middle class in emerging markets should propel this sector upward through the end of the year and through 2021.

The Select Sector SPDR Trust Healthcare ETF (NYSEArca: XLV) is up $37.66 from its 52-week low of $73.54. It just hit a new high of $114.41, and I think we’re going to blast past this before the year is over. Investing in this ETF is a good way to make money on the profitable sector as a whole, and writing covered calls on XLV is a great way to put the shares to work for you with regular income.

The strongest stocks in this sector, two companies that have rallied over the past three months, are Align Technology Inc. (NASDAQ: ALGN) and DaVita Inc. (NYSE: DVA). DaVita, in particular, is skyrocketing on the latest vaccine news.

Airlines are probably right up there with energy in terms of sheer devastation; they were gutted in 2020 with a drastic reduction in passenger traffic – expected to be down 60% to 70% both domestically and globally before the end of the year. The top six largest airline companies in the world lost a total of $110 billion in revenue year to date. They have been figuratively running on fumes and struggling to remain solvent. This chart really jumps out:

The NYSEArca Airline Index (NYSEArca: XAL) tanked in the first quarter of the year, hitting a low of $36.49. XAL is currently trading at $76.68 but still has a ways to go before it hits its 52-week high of $112. Unlike the rest of the general market, it has not recovered in 2020, but there’s still an innate opportunity here that hasn’t been released yet – profits bottled up, ready to explode, to be yours for the taking. I’d urge you to use good risk management and position sizing on this one.

I think this sector is going to take off (no pun intended) once travel bans are lifted and people start to travel for business and pleasure again.

As you can see in the chart above, XAL gapped up on the Pfizer and Moderna vaccine news announcements. That was probably a little early, but recovery is coming here.

Trade the sector with XAL or grab one of the sector leaders like Southwest Airlines Co. (NYSE: LUV) or Delta Air Lines Inc. (NYSE: DAL) – they’ll be leading the bullish charge when it starts.

Microchips – semiconductors – have been strong over 2020 despite a U.S.-China trade war that kicked into full swing in 2019. It is expected that the Biden administration will ease tensions with China along with tariffs, which will ultimately impact U.S. manufacturers.

I think this run will be huge for a couple of reasons, but mainly because a stimulus package is likely to occur under the new administration, and more money in consumers’ pockets inevitably leads to them to purchase new products like the iPhone 12 and the PS5 – just to name two.

One easy way to jump on the microchip train is to purchase the SPDR S&P Semiconductor ETF (NYSEArca: XSD). It set all-time highs last week and is destined for more growth into the new year.

Two of my personal favorite companies are Broadcom Inc. (NASDAQ: BRCM) and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). Taiwan Semiconductor is skyrocketing and just set an all-time high of its own with big volume.

That brings us to the financials. The financial sector is up a whopping 12% in the past three months alone – bank stocks have been leading that charge. An economic recovery and a stimulus package are expected to increase loan demand to propel that even further. All the while, the Fed is totally committed to keeping interest rates “lower for longer.” That’s financial-sector rocket fuel.

The market confirms this expectation with gaps up in the Financial Select Sector SPDR ETF (NYSEArca: XLF) on the Pfizer and Moderna news.

A little deeper down, the top performers in the past three months are Invesco Ltd. (NYSE: IVZ) and Discover Financial Services (NYSE: DFS).

Invesco ought to be familiar if you’ve got money in the markets; it’s an investment management company. IVZ is currently trading at $16.51, up from the 52-week low of $6.38. Discover, of course, is a financial services company – in fact, you may even have a Discover card in your wallet – that is skyrocketing currently. This company is currently trading at $78.41, up from the 52-week low of $23.25.

The bottom line? The recovery is coming – possibly faster than folks realize. The “sector SPDRs” are an easy way to get all that pent-up demand and upside potential working for you. I’m looking forward to trading them next year.

— Tom Gentile

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Source: Money Morning