ETF 2021 Outlook: Things You Must Remember
ETF or exchange-traded funds are a combination of securities that are traded on an exchange. Most of the securities in an ETF include stocks, bonds, commodities, currencies, or a combination of these. ETFs offer diversified and low-cost access to a precise area of the market, allowing investors to purchase a basket of securities without purchasing each one individually. The securities you buy represent your proportional interest in the total asset pool. Over the years, ETFs have grown tremendously in popularity, owing to their wide variety of investment choices and promising returns.
As per reports, 2020 was another great year for the ETF industry. There were record inflows and even higher ETF launches. According to Bloomberg, ETFs recorded nearly half a trillion dollars of inflows for the year 2020. For 2021, the future of ETFs seems bright. After a year that showed the best and the worst of times, it would be interesting to witness how the economy recovers in 2021. With the introduction of additional COVID-19 relief measures and the wide rollout of the vaccines, in addition to a new administration in Washington, experts suggest a strong economic recovery in 2021 and an attractive future for ETFs.
Here’s an outlook on ETFs to remember for a profitable 2021:
1. Understand the barbell cyclical and secular change
The U.S. economy is expected to rebound in 2021, owing to the positive news about the COVID-19 vaccines and the surprisingly sound economic figures. However, the impact of the pandemic has created both uncertainty and new opportunities, puncturing the equilibrium of societal norms. Therefore, 2021 would require balancing recurring opportunities stemming from an economic recovery. It is going to be a year of recovery but not an easy one. Moreover, if the economy is expected to grow, then investors would prefer cheaper sources of growth. So, if two stocks are expected to offer 10% in growth earnings, and one is trading at the price-to-earnings ratio multiple of 21 and the second one at 13, it is likely that investors will opt for the latter. Moreover like 2021, the thematic ETFs, especially focused on cloud computing, e-commerce, disruptive growth, video gaming, etc., are expected to rise. But since the pandemic is a once-in-a-lifetime event, the recovery model cannot be specified. Hence, with chances of an uneven recovery, it is advisable to be more cautious in security selection and portfolio creation. Overall, a diversified investment approach that is weighted towards non-market-cap can be optimal.
2. Balance risk for income
The COVID-19 pandemic has distorted fixed income portfolios.Interest rates have reached historic lows, and the ultimate challenge in today’s fixed income securities is to balance risk to pursue income and optimally diversify. In this low yield environment, taking a higher risk over time can help you get adequate income in 2021. Your core portfolio could include investments in long-term Treasuries, high-yield bonds, high-yield dividends, or preferred stocks. You can also think of adding auxiliary bond segments that can help provide income and diversification when combined with your core portfolio. These funds could support you to balance risk to secure income. Further, it can be beneficial to choose mortgages to reduce volatility with higher income. You can also consider spreading credit risk with senior loans, currency risk with emerging market debts, and both these risks with preferred stocks.
3. Leverage the impact of global cooperation
The new Biden-Harris administration is focused on a global agenda involving trade, diplomacy, and climate policy. This combined with improving economic fundamentals and secular trends, could help investors profit by investing in emerging Asian market equities, with specific trade-in clean power and clean technology companies. The shares of clean power companies have already recorded good performance, leading the way to the potential 2021 trend. In 2019, the clean power companies, outdid the S&P 500 index by 31% and the S&P 500 Energy sector by 51%. The trend was even stronger in 2020, owing to the pandemic and Biden’s win. And even though the overall market cap of the clean power industry is much lower than the traditional Energy sector, the transformative global policies, capacity additions, change in approach, etc., potentially indicate that clean power stocks could prove highly beneficial in 2021. As an investor, it is good to add a few of such stocks to your security basket, provided it matches your financial aspirations and risk appetite.
4. Expect new ETFs on technological disruption
Technological disruptionalready made a strong foundation in 2020. The year 2021 will be more focused on Artificial Intelligence (AI), 5G, semi-conductors, and other disruptive technologies. Moreover, on the global front, there will be more emphasis on green infrastructure and digitization, keeping even the mightiest of economies including the U.S. engaged. Further, in the auto industry, self-driven cars could be a game-changer. Hence, with these new technologies set to revolutionize different industries, new and profitable ETFs could emerge. You can consider investing in any such promising ETF.
5. Keep an eye on ETFs that hold international equities
As per expert estimates, ETFs that hold international equities will be the most coveted in 2021. These ETFs are expected to account for more than 50% of the total 2021 inflows. And even though, in 2020 these ETFs represented merely 26% of the overall equity inflows, several recent trends indicate a hopeful leap to 50%. First, many international equity markets hold lower valuations as compared to U.S. equities. Secondly, globally all countries have responded differently to the COVID-19 pandemic in terms of an economic stimulus. This aggravates the case of single-country investing. Thirdly, the new Biden administration might change the approach to international trade, impacting foreign currencies, which in turn affects the U.S. ETFs that hold international stocks.
6. High-quality ETFs over junk bond ETFs
In 2021, as healthcare workers, policy officials, and even financial professionals struggle to fully decode the ramifications of the COVID-19 pandemic, it is good to be cautious than splurge in investments. You could opt for investment-grade active fixed income securities over high yield. Further, it is advisable to do your own extensive credit research to avoid any risk of possible future
7. Look out for environmental, social, and governance (ESG) ETFs
ESG ETFs have been in demand for the past few years. An investment trend that began in Europe quickly escalated to U.S. institutional investors. However, now these ETFs have also begun to attract retail investor interest. This has led to increased inflows to the existing ESG ETFs and also promoted the emergence of new ESG ETFs. This trend will continue in 2021. Hence, you could keep looking out for promising ESG ETFs and optimally diversify your portfolio.
8. Watch for Bank ETFs in 2021
2021 is likely to fare well for banks and you could expect a bank rally this year, owing to a steepening yield curve and promising economic recovery. Banks have the Fed’s permission to resume the practice of share buybacks, in the first quarter of 2021. This permission exists even against the risk that some of the country’s biggest lenders can face loan losses accounting for over $600 billion. JP Morgan Chase has already initiated a new share repurchase of nearly $30 billion. Hence, you could think of investing in bank ETFs in the hope of a future However, you should be prepared for some short-term bumps, but in the long-term, these ETFs are likely to gain.
9. China ETFs might not be a good choice
As is known, the U.S.-China ties soured during the Trump era and they are not expected to recoup even in the Biden regime. As a result of the tensions between the countries, the New York Stock Exchange has already started delisting a few of the Chinese telecom companies. Moreover, with China shifting its attention towards Europe, it may be advisable to reconsider your China-based ETFs. However, China ETFs are not likely to decrease in value because of the way the country smoothly handled the pandemic, its progress towards automation, and 5G. But even with an increase in the China ETF value, it might not be as profitable for the U.S. investors. Hence, it may be best if you reconsider your ETF holdings in this space.
10. Bitcoins can be a profitable prospect
Bitcoins have been gaining immense popularity recently and experiencing a surge in their prices. Currently, Bitcoin has been trading above $50,000. In 2020, Bitcoin was up by nearly 200%. Moreover, with rising inflation and negative news of monetary policy, it may help to opt for alternative ways like Bitcoin-focused ETFs, if they come into existence, to preserve the value of your capital.
To sum it up
2020 completely shook the world. The pandemic disrupted the foundation of society and the economy, as millions lost their lives, loved ones, and livelihoods. However, despite the devastating pandemic, several bright spots appeared affirming confidence in society and the economy. Vaccines have been developed in record time, disruptive technologies are emerging across industries, community work has increased, clean technology has come to light, and several other positive aspects have surfaced. But the worst may not be over as the pandemic continues to spread and the government continues to plan new fiscal and monetary measures to reboot the economy in 2021. In such an economic scenario, it may be wiser for you to adopt a more holistic approach to investment and consider the ETF outlook for the year before making any investment decisions.
If you need professional guidance, you can consult with a vetted financial advisor in your area to be sure of your investment decisions amidst the uncertainty, to reach your financial goals.