The 21 Best ETFs to Buy for a Prosperous 2021
Exposure to emerging trends. Core holdings. Tactical defensive plays. The 21 best ETFs for 2021 cover a wide range of options for numerous objectives.
It would seem a fool's errand to predict the best exchange-traded funds (ETFs) for 2021. After all, 2020 reminded us just how unpredictable the market can be.
Fortunately, that's not what this annual feature has ever been about.
The best ETFs for 2021, just like in previous years, do include optimistic funds designed to take advantage of various trends Wall Street's brightest minds expect to lead in the year ahead.
However, the market doesn't care about our arbitrary calendar dates. And as 2020 proved, things don't always go according to plan anyway. Thus, our annual list also includes a few go-anywhere ETFs to hold through the entire year, and even a couple defensive funds you might only tap when it looks like trouble is en route.
We're proud of our 2020 list. The full 20 funds delivered a total return (price plus dividends) of 16.1%, more than a percentage point better than the S&P 500's 14.9%. The equity portion did far better, averaging 20.7% gains to trounce the broader market.
So what does 2021 have in store? Goldman Sachs, which assumes the S&P 500 will close 2020 at 3,700, thinks there's another 16% upside next year thanks in part to a massive 29% rebound in earnings. Under the same assumption, Piper Sandler's year-end price objective of 4,225 would represent a 14% gain for the S&P 500. And in Kiplinger's 2021 investing outlook, Executive Editor Anne Kates Smith says returns will be "more along the lines of high-single-digit to low-double-digit percentages."
No one expects the market to climb in a straight line. The beginning of 2021 could see volatility because of large-scale COVID-19 outbreaks. Broadly speaking, though, most analysts believe widespread vaccinations will gradually boost both the economy and stocks. Cyclical and value-oriented sectors are expected to be the greatest beneficiaries.
Here are the 21 best ETFs to buy for 2021. This is an intentionally wide selection of ETFs that meet a number of different objectives. We don't suggest investors go out and stash each and every one of these funds in their portfolios. Instead, read on and discover which well-built funds best match what you're trying to accomplish, from buy-and-hold plays to defensive stop-gaps to high-risk, high-reward shots.
Data is as of Dec. 14. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard S&P 500 ETF
- Type: Large-cap blend
- Assets under management: $172.5 billion
- Dividend yield: 1.6%
- Expenses: 0.03%, or $3 annually for every $10,000 invested
We start our list of 2021's best ETFs with a familiar face: The boring ol' Vanguard S&P 500 ETF (VOO, $335.01), which simply tracks the S&P 500 Index of primarily U.S. blue-chip stocks. And we'll likely lead with it for years to come.
In April 2020, S&P Dow Jones Indices released its annual report on actively managed funds and their performance against their benchmarks. And yet again, it wasn't pretty:
"Large-cap funds made it a clean sweep for the decade – for the 10th consecutive one-year period, the majority (71%) underperformed the S&P 500. Their consistency in failing to outperform when the Fed was on hold (2010-2015), raising interest rates (2015-2018), and cutting rates (2019) deserves special note, with 89% of large-cap funds underperforming the S&P 500 over the past decade."
As Niles Crane might say: "It's not a fight; it's an execution!"
This is the performance of seasoned professionals who are paid, and paid well, to select stocks for their customers. So what can one reasonably expect from mom-'n'-pop investors who only have an hour or two each month to spend reviewing their investments? All things considered, merely matching the market is respectable.
The Vanguard S&P 500 ETF does precisely that, giving you exposure to the 500 companies within the mostly U.S.-headquartered companies trading on the major American stock exchanges. It's what many people have come to think of when they think of "the market," given its large and diverse array of components.
It is not, however, perfectly balanced. At writing, the SPY was more than a quarter invested in tech stocks such as Apple (AAPL) and Microsoft (MSFT), but had only a 2% "weight" (the percentage of assets invested in a stock) in energy firms such as Exxon Mobil (XOM) and Chevron (CVX).
Also, the S&P 500 is market-cap weighted. That means the larger the stock, the more assets the VOO invests in that stock, and thus the more influence the stock has over performance. This could be a risk if investors "rotate" out of heavily weighted 2020 standouts such as Apple, Microsoft, Amazon.com (AMZN) and, as of Dec. 21, Tesla (TSLA), and into stocks with less influence on (or outside of) the S&P 500.
But, like every year, what lies ahead is unknown. What is known is that investors typically are well-served by having cheap, efficient exposure to the broader U.S. stock market. And that's why VOO belongs among our best ETFs to buy for 2021.
iShares ESG Aware MSCI USA ETF
- Type: Large-cap blend (ESG criteria)
- Assets under management: $12.7 billion
- Dividend yield: 1.3%
- Expenses: 0.15%
One of the most prominent trends of the past few years has been a shift toward prioritizing environmental, social and corporate governance, or ESG, criteria. Investors who are concerned about everything from sustainable practices to minority representation in company boardrooms are demanding changes.
And corporate America is increasingly finding that it pays to listen.
"The reasons for the robust performance of ESG funds can vary and need to be evaluated on a case-by-case basis," says SSGA Carlo M. Funk, EMEA Head of ESG Investment Strategy for State Street Global Advisors. "In aggregate, however, the extraordinary year of 2020 supports our main view: Companies with superior corporate governance and better environmental and social practices than their peers display greater resilience and preserve long-term value more effectively during times of market stress."
Investors are speaking with their assets, too, and loudly. Todd Rosenbluth, Head of ETF & Mutual Fund Research for CFRA, says that "net inflows to broad ESG ETFs, which focus on environmental, social and governance metrics, more than tripled in the first 11 months of 2020 relative to 2019."
Leading the way has been the iShares ESG Aware MSCI USA ETF (ESGU, $83.57), which saw $9.3 billion in inflows during that time.
ESGU tracks the MSCI USA Extended ESG Focus Index, which is comprised of large- and mid-cap stocks that MSCI has determined possess positive ESG characteristics. The index also excludes firms such as weapons manufacturers and tobacco companies, as well as those "involved in very severe business controversies."
This diversified group of more than 340 companies can act as a core large-cap holding. It has been a fruitful one, too – ESGU has outperformed the aforementioned VOO, 19.4% to 15.4%, on a total return basis (price plus dividends) through the lion's share of 2020. And it should be one of the best ETFs for 2021 if you're looking for bedrock ESG exposure.
Just note that like VOO, ESGU isn't perfectly balanced, either – nearly 30% of the fund's holdings are invested in technology, and it has less than 3% exposure each in four different sectors. Also, the idea of what's ethically palatable varies from person to person, so you might not agree with ESGU's criteria. So if ESGU isn't for you, consider these other ESG funds instead.
Vanguard Value ETF
- Type: Large-cap value
- Assets under management: $61.4 billion
- Dividend yield: 2.7%
- Expenses: 0.04%
Starting in the late 1920s, value investing spent a good eight decades beating the pants off of growth investing. That feels like forever ago, however. Because ever since the Great Recession, growth – led largely by technology and tech-related names – has left value in its dust.
Most years, you'll hear a few predictions that "value is due," but those cries have grown louder and wider as the economy tries to pick itself up out of recession. In fact, value is en vogue as analysts look ahead to 2021.
"We believe that value stocks may be poised to benefit from an accelerating economy before returning to the 'old normal' of structurally impaired economic growth," write Invesco strategists Brian Levitt and Talley Léger. Vanguard agrees, noting that "parts of the U.S. equity market, including value-oriented sectors, are projected to have somewhat higher returns after an extended period of significant underperformance."
Dipping into individual stocks could be perilous however, as BlackRock analysts say that while value could indeed run ahead in 2021, "we believe any of the companies … face structural challenges that have been exacerbated by the pandemic.
One way to prevent having a single value pick blow up in your face is by investing across the style via funds such as Vanguard Value ETF (VTV, $116.97). This inexpensive index fund holds roughly 330 U.S. large- and mid-cap stocks that look attractive based on value metrics including price-to-earnings (P/E), forward P/E, price-to-book, price-to-sales and price-to-dividend.
VTV ranks among the best ETFs for 2021 given its fees, simplicity and exposure to a potential hotbed for returns in the year to come. This Morningstar Gold-rated fund "is one of the cheapest large-value funds available, an excellent, low-turnover strategy that accurately represents the opportunity set available to its peers," according to Morningstar Director Alex Bryan.
The VTV is filled with old-guard blue chips such as Johnson & Johnson (JNJ) and Procter & Gamble (PG), not to mention Berkshire Hathaway (BRK.B), helmed by Warren Buffett, who knows a thing or two about value himself. It also yields well more than the market at the moment, making it appropriate for income-minded investors who feel like hanging on to it long after 2021 comes to a close.
Distillate U.S. Fundamental Stability & Value ETF
- Type: Large-cap value
- Assets under management: $202.1 million
- Dividend yield: 0.8%
- Expenses: 0.39%
Value is in the eye of the beholder. What one investor might view as a value, another might merely see as cheap.
Enter the Distillate U.S. Fundamental Stability & Value ETF (DSTL, $35.78), which remains among our best ETFs for the third consecutive year.
DSTL doesn't rely on P/E, P/S, nor a number of other more traditional value metrics. Instead, the ETF focuses on free cash flow (the cash profits left over after a company does any capital spending necessary to maintain the business) divided by its enterprise value (another way to measure a company's size that starts with market capitalization, then factors in debt owed and cash on hand).
This "free cash flow yield" is much more reliable than valuations based on earnings, says Thomas Cole, CEO and co-founder of Distillate Capital. That's because companies report different types of financial results – ones that comply with generally accepted accounting principles (GAAP), sure, but increasingly, ones that don't, too.
Distillate U.S. Fundamental Stability & Value ETF starts out with 500 of the largest U.S. companies, then weeds out ones that are expensive based on its definition of value, as well as those with high debt and/or volatile cash flows.
The result, at the moment, is a portfolio that's heavy on tech stocks (25%), though leaner than the 32% it sported at this time last year. Industrials (19%) and health care (19%) also account for large chunks of assets. Cole, in a quarterly update to investors, writes that after its most recent rebalancing, the strategy "has significantly more stable long-term fundamentals and less financial leverage than the S&P 500 Index, which we believe will continue to be important attributes amid ongoing near-term economic pressures."
The proof is in the pudding, so they say, and investors in DSTL have enjoyed every spoonful. This young fund, launched on Oct. 23, 2018, has returned 47.9% since then – not just outperforming the three largest value-style ETFs by an average of 30 percentage points, but beating the S&P 500 by a solid 10 points.
"We think value works," Cole says. "We don't think it ever really stopped working."
Schwab US Small-Cap ETF
- Type: Small-cap blend
- Assets under management: $12.5 billion
- Dividend yield: 1.2%
- Expenses: 0.04%
Sam Stovall, Chief Investment Strategist at CFRA, points out that since 1979, when the small-cap benchmark Russell 2000 was created, it has put up 15.9% returns on average during the first year of the four-year presidential cycle.
That's more of a fun fact than anything prescriptive, but there are plenty more tangible reasons to believe small caps will extend their recovery well into 2021.
"Small caps generally outperform large caps when the economy is recovering and a new credit cycle is emerging," say Invesco analysts. "High-yield corporate bond spread tightening is helped by abundant central bank liquidity, a gradual economic recovery, rebounding corporate profits, improving credit conditions and ebbing volatility.
"That should sound familiar because those are the tailwinds currently behind small-cap stocks."
The Schwab US Small-Cap ETF (SCHA, $86.31) is a simple, effective and extremely diversified way to invest across small caps. The portfolio of more than 1,700 stocks isn't a pure small-cap fund – less than half are in the mid-cap space. But importantly, these stocks are all much more heavily tethered to the domestic economy, so if the U.S. is in for a 2021 rebound, SCHA should be one of the best ETFs to leverage it.
Top holdings such as Novocure (NVCR), Caesars Entertainment (CZR) and Cloudflare (NET) each make up only about 0.4% of the fund's weight, so it's clear that no single stock is going to tank this portfolio. But SCHA does lean more heavily toward some sectors than others – healthcare (18.4%), industrials (15.3%) and financials (15.1%) are tops at the moment. So investors will enjoy significant exposure to some of the upcoming year's best rotation plays.
Best of all, Schwab's small-cap fund is as cheap as it gets. Morningstar data shows SCHA as the lowest-cost small-cap stock fund on the market at just four basis points, which comes out to all of $4 annually for every $10,000 invested.
Industrial Select Sector SPDR Fund
- Type: Sector (Industrials)
- Assets under management: $16.4 billion
- Dividend yield: 1.6%
- Expenses: 0.13%
Industrial stocks' sensitivity to both the U.S. and global economies made them one of the hardest hit S&P 500 sectors during the bear market, off 40% through the March 23 bottom versus 31% for the wider index.
It has come roaring back since then, however, and it's currently en vogue as one of analysts' favorite turnaround picks for 2021.
"We are upgrading Industrials from a Neutral to Overweight rating," says Piper Sandler Technical Market Strategist Craig Johnson. "The sector continues to report impressive (relative strength) and offers leverage to the reopening theme." Goldman Sachs notes that industrial stocks have the highest consensus earnings growth-rate estimates for any sector, with the pros modeling a 79% snap-back in 2021.
There aren't a ton of broad-sector options. But the Industrial Select Sector SPDR Fund (XLI, $87.62), the largest among industrial ETFs, does the trick nicely.
The XLI holds the 73 industrial-sector stocks in the S&P 500. Naturally, that skews toward large caps in the first place, and since the fund is market cap-weighted, the biggest stocks command the biggest weights. But top holding Honeywell (HON), the diversified industrial recently elevated to the Dow Jones Industrial Average, accounts for just 5.7% of assets – a meaningful weight, but not a worrisome one. Railroad operator Union Pacific (UNP, 5.2%) and aircraft manufacturer Boeing (BA, 4.6%) are next largest after that.
Zooming out a little bit, you're getting heavy exposure to aerospace and defense (19.6%), machinery (19.3%) and industrial conglomerates (14.8%) – all likely beneficiaries as the global economy gets back into gear. You're also getting decent-sized chunks in road and rail (11.9%), air freight (8.2%) and electrical equipment (5.7%).
Invesco WilderHill Clean Energy ETF
- Type: Thematic (Clean energy)
- Assets under management: $1.7 billion
- Dividend yield: 0.4%
- Expenses: 0.70%
The Invesco WilderHill Clean Energy ETF (PBW, $89.11) is a Kip ETF 20 fund that did extremely well for itself in 2020. This fund, which invests in 46 green energy stocks – things such as solar-energy firms, lithium miners and electric-vehicle makers – has returned 162% through mid-December 2020, making it one of the top five equity ETFs on the market.
Depending on how the political dominoes fall, PBW should at least be productive again in 2021, if not finish as one of the year's best ETFs yet again.
"Green energy and electric vehicles were one of the centerpieces of presumptive President-Elect Biden's campaign platform, as he has proposed new tax incentives, government purchases, and other measures to benefit EVs," says CFRA analyst Garrett Nelson.
Just how green-friendly the administration is pivots somewhat on just how accommodative Congress is, so the Georgia runoffs will be an important part of that. But even with a split Congress, green energy could still be in store for a big year.
"There is some expectation a Biden administration will be supportive of renewable energy within the federal scope," says Mary Jane McQuillen, Head of Environment, Social and Governance Investment at ClearBridge Investments. "This appears likely although it is not an essential part of our investment case there, which rests mainly on much larger state and corporate commitments."
Invesco WilderHill Clean Energy ETF provides investors with exposure to this burgeoning trend through mostly mid- and small-cap stocks with oodles of growth potential. Top holdings at the moment include FuelCell Energy (FCEL), Blink Charging (BLNK) and Nio (NIO).
John Hancock Multifactor Consumer Discretionary ETF
- Type: Sector (Consumer cyclical)
- Assets under management: $39.8 million
- Dividend yield: 0.9%
- Expenses: 0.40%
Vaccination is the key to unlocking many consumer discretionary stocks.
As Americans get vaccinated, they'll be increasingly able to go out and spend on things they haven't been able to over the past year: dining out, going to movies, traveling. That in turn should help employment in those battered industries, and those new workers will be able to ramp up their spending once again, too.
Goldman Sachs sees consumer discretionary earnings rebounding by a sharp 63% in 2021. "Improving fundamentals continue to support our favorable view on the Consumer Discretionary and Communications Services sectors," add Wells Fargo Investment Institute analysts Ken Johnson and Krishna Gandikota.
But how you select a consumer discretionary ETF largely has to do with how good of a year you think Amazon.com will have in the year ahead. That's because many sector funds, including the two largest – the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Vanguard Consumer Discretionary ETF (VCR) – have more than 20% of their assets invested in the online retail stock because they're weighted by market cap and Amazon is a behemoth.
Those ETFs have benefited from Amazon's nearly 70% gain through most of 2020 spurred by COVID-19 boosts to multiple parts of its business. But similarly, they could suffer if the e-tail giant cools off.
If you're looking for something with a little more balance, consider the John Hancock Multifactor Consumer Discretionary ETF (JHMC, $44.41). The fund tracks a multifactor index that emphasizes "factors (smaller cap, lower relative price, and higher profitability) that academic research has linked to higher expected returns."
You'll still own Amazon – you'll just own less of it. Amazon.com, at 4.8% in assets, isn't even the biggest position in the 114-stock portfolio. Tesla is, at 4.9%. You'll also hold the likes of Home Depot (HD), McDonald's (MCD) and Booking Holdings (BKNG). The largest industry positions in this are in specialty retail (25.5%) and hotels, restaurants and leisure (18.0%).
That latter industry is a popular bet among investors looking for big deep-value rebounds; sadly, there are no pure-play funds investing in the space. Your best available bet is the Invesco Dynamic Leisure and Entertainment ETF (PEJ), with about 45% of assets dedicated to hotels, restaurants and leisure. Another "honorable mention" travel-recovery play? The ETFMG Travel Tech ETF (AWAY), which invests in travel bookings, reservation, price comparison and advice stocks, as well as ride sharing and hailing companies.
Roundhill Sports Betting & iGaming ETF
- Type: Thematic (Gambling)
- Assets under management: $177.6 million
- Dividend yield: N/A
- Expenses: 0.75%
Sports weren't immune to the COVID-19 threat. MLB stumbled through a significantly shortened season. The NBA and NHL finished out their seasons in "bubbles." The NFL has had to shuffle its schedule because of coronavirus outbreaks. Major League Soccer's Columbus Crew just won the MLS Cup with two star players out due to COVID.
Not to mention, the NCAA lost the 2020 basketball championships, college football has been littered with cancelations, and numerous other collegiate sports were impacted.
Despite this pockmarked landscape, sports betting revenues are on pace to finish above $2.3 billion – a 150%-plus explosion from roughly $910 million in 2019. And things look even better for the industry heading into 2021, making the Roundhill Sports Betting & iGaming ETF (BETZ, $24.63), up 52% in 2020, a likely contender to be among next year's best ETFs as well.
"If all goes to plan in regards to vaccine rollout, it won't be normal in the sense that the calendars are funky, with the NBA kicking off preseason right now, but it should be a full year of sports if all goes to plan," says Will Hershey, co-founder and CEO of RoundHill Investments.
That will allow the industry to keep building upon a growing base of states that are legalizing sports betting. New Jersey, which OK'd sports gambling in June 2018, recently achieved yet another monthly record of nearly a billion dollars wagered in November.
"States are looking at the kind of tax revenues New Jersey has been able to bring in both through online sports betting and online casinos," he says, adding that COVID seems to be accelerating states' consideration of this benefit. Three more states (Louisiana, South Dakota and Maryland) approved sports-betting measures in this latest election cycle.
Several large states remain. Hershey believes one of them, New York, might try to allow online sports betting in a revenue bill in Q1 2021. There's also potential in Canada, whose parliament recently introduced a bill to legalize single-match sports betting.
BETZ's roughly 40-holding portfolio is more than just a play on the U.S., however. Almost half of assets are dedicated to U.K. and the rest of Europe, 40% is allocated to North American firms, and the rest is spread across Australasia and Japan.
Most investors will be familiar with popular U.S. names DraftKings (DKNG, 5.1%) and Penn National Gaming (PENN, 4.7%), which bought Barstool Sports in January 2020. But there are plenty of interesting international names as well.
BETZ holds Flutter Entertainment (PDYPY), an online betting conglomerate whose assets include Betfair, Paddy Power and PokerStars. It recently spent $4.2 billion to increase its stake in online sportsbook market-leader FanDuel to 95%. There's also Sweden's Kambi Group, which Hershey refers to as a "picks-and-shovels" play on the industry; it provides technology and data to the likes of Penn National and Rush Street Interactive.
Invesco KBW Bank ETF
- Type: Industry (Banks)
- Assets under management: $1.2 billion
- Dividend yield: 3.1%
- Expenses: 0.35%
Jonathan Golub, Chief U.S. Equity Strategist at Credit Suisse, points out that the roadmap for banks in 2021 looks like previous recession recoveries: "improving credit conditions, increasing transaction volumes, and a steepening yield curve."
They look even better when you consider financials are one of the market's cheapest sectors, and that their earnings estimates are largely conservative, he adds.
Keefe, Bruyette & Woods analysts Frederick Cannon and Brian Kleinhanzl add a word of caution, noting that "regulatory constraints will increase." But they add that "we believe the early indications from President-elect Biden are for only moderately stricter regulations on the financial sector," and that "financial stocks are well poised for outperformance."
The Invesco KBW Bank ETF (KBWB, $47.95) is one of the best ETFs you can buy for a rebound specifically in the banking industry. Unlike broader financial-sector funds that hold not just banks, but investment firms, insurers and other companies, KBWB is a straightforward ETF that's almost entirely invested in banking firms.
Why just banks? Because you can play the rebound at cheaper prices and at higher yields to boot.
KBWB not a particularly diverse banking ETF, concentrated in just two dozen companies. That includes major money-center banks such as U.S. Bancorp (USB) and JPMorgan (JPM), as well as super-regionals such as SVB Financial Corp (SIVB) and Fifth Third Bancorp (FITB).
Meanwhile, Invesco KBW Bank ETF is cheaper in several metrics than financial-sector funds such as the Financial Select Sector SPDR Fund (XLF), and it currently offers more than a percentage point in additional yield.
Global X FinTech ETF
- Type: Thematic (Financial technology)
- Assets under management: $930.9 million
- Dividend yield: 0.0%
- Expenses: 0.68%
If investors are rotating into certain sectors, naturally they have to get the assets from somewhere. 2020 already showed signs of investors taking profits in many of the year's highfliers, and that's expected to continue in 2021.
That would sound like trouble for the Global X FinTech ETF (FINX, $44.94) – a collection of financial-technology companies whose digital solutions were highly sought after during the pandemic, helping FINX climb 46% through mid-December 2020.
But several analysts think that, unlike other growing industries that enjoyed a COVID boost, financial technology might not take a breather before continuing higher.
William Blair analysts say "digital banking technology adoption has accelerated and we expect growth of adoption of digital banking technology to remain strong or even accelerate in 2021." They add that they expect accelerated investment in business-to-business electronic payments in 2021 (and for the next several years), and they also expect initial public offering (IPO) and mergers-and-acquisitions (M&A) activity "to be robust in 2021."
KBW's Cannon and Kleinhanzl agree. "We expect an acceleration of IPOs of FinTech firms, increases in bank and insurance company purchases of FinTech technologies, and consumers' continued shift to virtual financial service delivery," they write in their 2021 outlook
Global X's FINX, then, could be one of the best ETFs to buy for 2021 after shining in 2020.
This fintech ETF has a tight 33-company portfolio that boasts a few names you know, such as Square (SQ), PayPal (PYPL) and TurboTax maker Intuit (INTU). But it's also geographically diversified, with international companies making up more than 40% of assets. That gives you access to the likes of Dutch payment firm Adyen (ADYEY) and Brazil's StoneCo (STNE), a Warren Buffett stock that took off by 88% in 2020.
ARK Innovation ETF
- Type: Thematic (Innovative technologies)
- Assets under management: $16.1 billion
- Dividend yield: 0.2%
- Expenses: 0.75%
It's fair to say that 2020 was the year of Cathie Wood.
Wood, the founder, Chief Executive Officer and Chief Investment Officer of ARK Invest, manages the portfolios of five separate innovation-themed funds that sit atop the 25 best-performing equity ETFs of 2020, based on Morningstar data through Dec. 11:
- ARK Genomic Revolution ETF (ARKG, No. 1)
- ARK Next Generation Internet ETF (ARKW, No. 4)
- ARK Fintech Innovation ETF (ARKF, No. 16)
- ARK Autonomous Technology & Robotics ETF (ARKQ, No. 22)
- And then there's the ARK Innovation ETF (ARKK, $124.25), a blending of those four strategies, which comes in at No. 6.
That performance helped ARKK become "the most popular active ETF in 2020," according to CFRA's Rosenbluth, who points out that the fund "pulled in $6.4 billion year-to-date through November, making it the 18th most popular U.S. listed ETF."
While COVID-19 certainly played to her investments' strengths, make no mistake: The ARK funds have outperformed just about every comparable rival, showing why it sometimes pays to shell out a few more basis points in expenses for active management.
All of Wood's ETFs are based on "disruptive innovation … the introduction of a technologically enabled new product or service that potentially changes the way the world works." Consider ARKK something of a "best ideas" list from the disruptive innovators across ARK's four main themes: genomics, industrial innovation, next-gen internet and financial technology.
ARKK typically holds 35 to 55 stocks. Top holdings at the moment include a nearly 10% stake in Tesla, which Wood famously predicted in 2018 would hit $4,000 before upping that target to $6,000 earlier this year. That's followed by streaming device-maker Roku (ROKU, 7.0%) and genetic-testing expert Invitae (NVTA, 6.24%).
Those holdings could change in a hurry. The actively managed ARKK has a reported turnover rate of 80%, meaning the entire portfolio is cycled out once every 14 to 15 months on average.
Renaissance IPO ETF
- Type: Thematic (Initial public offerings)
- Assets under management: $676.1 million
- Dividend yield: 0.20%
- Expenses: 0.60%
Another area of the market that was battered during the 2020 market was initial public offerings (IPOs). Naturally, if investors were pulling their money out of well-established stocks, they certainly weren't going to bite on brand-new offerings of primarily newer, less-tested firms.
But IPOs have roared back. More than 200 offerings have priced in 2020 through mid-December, up 32.5% versus last year, according to Renaissance Capital. Proceeds raised have hit $76.4 billion, up 65.1%.
Those include recent deals for the likes of Airbnb (ABNB) and DoorDash (DASH), which blew away expectations and showed a ravishing hunger for new deals. Good news there: Plenty more IPOs are on the horizon for 2021.
The success of initial public offerings in 2020 helped the Renaissance IPO ETF (IPO, $65.28) more than double through mid-December, and continued investor eagerness to hop onto "the next big thing" could make it one of the best ETFs for 2021.
The Renaissance IPO ETF tracks the Renaissance IPO Index, which adds large new companies quickly after launch, then adds other recent offerings every quarter as their reviews permit. Once a company has been public for more than two years, it's removed during the next quarterly review.
Top holdings are a who's who of successful companies in 2020, including Zoom Video (ZM) at 10.5% of holdings, Moderna (MRNA, 5.9%) and Slack Technologies (WORK, 3.1%), which recently announced it would be bought out by Salesforce.com (CRM).
Initial public offerings can be difficult investments for investors with a quick trigger finger because of their often erratic trading shortly after they've gone public. Kiplinger contributor Tom Taulli, author of High-Profit IPO Strategies, even suggests waiting 30 days for hype to subside before buying individual IPOs. Investing in the IPO ETF can help you resist that urge while also making sure you're exposed to a diversified bundle of these exciting new stocks.
iShares Evolved U.S. Healthcare Staples ETF
- Type: Sector (Healthcare)
- Assets under management: $16.4 million
- Dividend yield: 0.70%
- Expenses: 0.18%
The phrase "you can have your cake and eat it too" certainly wasn't coined with the healthcare sector in mind, but it's certainly applicable. Healthcare funds effectively provide the best of both worlds, able to deliver growth during economic expansion, but also able to act defensively when the economy isn't running full steam ahead.
Counterintuitively, the current recession has been rough on the sector.
While healthcare was certainly in the spotlight given that our economic woes were health-related, much of the sector was actually harmed by the outbreak, not helped. A few Big Pharma, biotech and diagnostics companies were able to leverage the COVID outbreak, but for many, restricted hospitals, canceled surgeries, lost health insurance coverage and a general avoidance of non-essential healthcare hit much of the sector hard. In fact, the sector still lags the broader market through this late hour in 2020.
But it's getting plenty of looks heading into 2021. Credit Suisse says "Health Care should outperform given a more robust earnings trend." Policy uncertainty has also helped healthcare stocks trade at a "relative valuation discount" to the S&P 500, says Goldman Sachs.
"A divided U.S. government may benefit large-cap tech and healthcare as it likely takes corporate tax increases and big legislative changes off the table," adds BlackRock.
One of the best ETFs for 2021, then, is the iShares Evolved U.S. Healthcare Staples ETF (IEHS, $36.09). You can learn more about how the Evolved sector ETFs work here, but in short, big data analysis is used to look at how companies actually describe themselves, and companies are placed in sectors based on that data. Evolved sectors sometimes look similar to traditional sectors … and they sometimes have significant differences.
What makes IEHS stand apart is a roughly 75% weight in health care equipment (such as medical devices) and services (such as insurance). Compare that to about 45% in the Health Care Select Sector SPDR Fund (XLV).
The top holding is UnitedHealth (UNH), which you'll find atop many healthcare-sector ETFs given its size. Large weights are also given to the likes of Abbott Laboratories (ABT, 8.3%), which just increased its dividend by a whopping 25%; medical device maker Medtronic (MDT, 6.4%) and consumer-facing healthcare firm Johnson & Johnson (4.8%).
IEHS outperformed the healthcare sector in 2020. Given its positioning in healthcare industries poised for better things in 2021, it maintains a place among our best ETFs for another year.
AdvisorShares Pure US Cannabis ETF
- Type: Industry (Cannabis)
- Assets under management: $163.7 million
- Dividend yield: N/A
- Expenses: 0.74%
Marijuana stocks not only recovered along with the rest of the market this summer – they then enjoyed a rousing rally as the presidential elections came into focus. That's because a win for Joe Biden, whose administration has pledged to decriminalize marijuana and is generally seen as friendlier toward cannabis than another Republican administration, was viewed as a big win for weed.
Shortly thereafter, the House of Representatives passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act – legislation that would remove cannabis from the Controlled Substances Act (CSA) and expunge prior cannabis convictions for non-violent offenses, among other things. While it's unlikely to pass the Senate, it's still considered a material step forward.
"Although we don't expect full legalization of cannabis at the federal level any time soon, we believe Friday's vote in Congress represents yet another positive indicator that the overall sentiment towards cannabis acceptance continues to trend in the right direction," says Canaccord Genuity cannabis analyst Bobby Burleson.
"Independent of the Congress and the Senate, cannabis reforms continue to accelerate at the state level – most recently with Arizona and New Jersey voting in favor of legalizing adult-use programs – while many anticipate states such as New York, Pennsylvania and Connecticut to approve recreational cannabis as early as next year."
The AdvisorShares Pure US Cannabis ETF (MSOS, $33.84) is a brand-spanking-new way to play the space, and it might be the best one for the moment. Unlike many other funds that focus heavily on international marijuana firms (specifically Canada), MSOS is the first pure-play U.S. cannabis ETF.
While index funds are a great idea for many industries and sectors, active management seems a wise choice given the still-Wild West nature of the industry and the constant regulatory changes these firms need to navigate. Providing that guidance is portfolio manager Dan Ahrens, Chief Operating Officer of AdvisorShares Investments. He also manages MSOS's sister fund, AdvisorShares Pure Cannabis ETF (YOLO).
The Pure US Cannabis ETF, which came to life on Sept. 1, 2020, and has already collected more than $160 million in assets, is a tight grouping of just 25 components. More than half the fund is dedicated to multi-state operators (MSOs, hence the ticker) that frequently sport cultivation, processing and retail facilities. It also deals in cannabidiol (CBD) companies, real estate investment trusts (REITs), suppliers, biotech firms and other connected industries.
Expenses of 0.74% are hardly cheap, but they're certainly reasonable considering you're getting management expertise in a budding industry.
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund
- Type: Emerging markets
- Assets under management: $3.2 billion
- Dividend yield: 1.0%
- Expenses: 0.32%
This year's list of the best ETFs for 2021 is notably light on full-blown international exposure. That's in part because there are so many segments of the U.S. stock market that are showing promise, and in part because there's not a strong analyst consensus around many other areas of the world.
But emerging markets (EMs) do stand out as a potential source of growth.
"We expect emerging market economies to lead the global economic rebound in 2021," says LPL Financial Chief Market Strategist Ryan Detrick, whose firm adds that "a potentially weaker U.S. dollar and less contentious global trade environment may support emerging markets, notably China."
BlackRock strategists "like EM equities, especially Asia ex-Japan." And SSGA Chief Portfolio Strategist Guarav Mallik says that "we expect earnings growth in China to be especially resilient … digitization and consumption trends will warrant a reconsideration of EM equity exposures in general."
The WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE, $38.33) provides the right kind of coverage for this scenario. While this is a broad emerging-markets fund that has some exposure to the likes of Mexico, Chile and Poland, it's primarily tilted toward Asian EMs, especially China.
China makes up more than a third of the fund's weight, including top-two holdings Alibaba Group (BABA, 7.9%) and Tencent Holdings (TCEHY, 6.5%). But it also has large positions in South Korean (15.3%), Taiwan (14.0%) and India (12.5%), as well as smaller holdings across other Asian nations, including Malaysia, Indonesia and the Philippines.
But what makes XSOE really stand out is its exclusion of companies that have 20% or more government ownership.
"State-owned enterprises (SOEs) typically have an inherent conflict of interest as they often look to (or are forced to) promote the government's objectives at the expense of creating value for other shareholders," writes Alejandro Saltiel, Associate Director of Modern Alpha at WisdomTree. "This is often referred to as a 'national service' requirement of SOEs."
VanEck Vectors J.P. Morgan EM Local Currency Bond ETF
- Type: Emerging markets local-currency bond
- Assets under management: $3.4 billion
- SEC yield: 4.1%*
- Expenses: 0.30%
It's not just equity strategists that are high on emerging markets in 2021. Bond investors also see opportunity in the debt of developing countries, too.
"In light of a potential bear market in the U.S. dollar, emerging market (EM) currencies are poised to outperform; local-currency EM debt presents a particularly appealing opportunity," writes Thomas Coleman, Global Head of Fixed Income Investment at State Street Global Advisors. "EM local-currency real yields are above long-term averages and remain attractive, particularly when compared with U.S. real yields, which have recently turned quite negative."
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC, $32.99) is one of a handful of bond funds that provides this particular type of exposure: that is, not just emerging-market debt, but EM debt priced in local currencies, which would benefit from a declining U.S. dollar.
EMLC holds more than 300 sovereign-debt issues from roughly two dozen emerging markets including Brazil, Indonesia, Mexico and Thailand. The effective duration (a measure of risk) is 5.1 years, which effectively means that for every one-percentage-point hike in interest rates, EMLC would be expected to lose 5.1%. Credit risk is something of a mixed bag. Encouragingly, more than 40% of the portfolio is investment-grade, and 17% is considered "junk." The wild card is the roughly 40% in "unrated" bonds – unrated debt is often assumed to be junk, but that doesn't necessarily mean it is.
It's a risk you have to take when in investing EMLC, but it's a risk you're well-compensated for. In a market where yields from stocks and bonds alike are laughable, this emerging-market bond fund yields more than 4%, making it the best ETF on this list for those looking for high income in 2021.
* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.
Vanguard Tax-Exempt Bond ETF
- Type: Municipal bond
- Assets under management: $10.0 billion
- SEC yield: 1.2%
- Expenses: 0.06%
Municipal bonds are a potential opportunity in 2021, but they're hardly a sure thing.
"The valuation at the upper-end of the credit spectrum heavily favors tax-exempt municipal bonds over corporates," says BCA Research. "Investors that can take advantage of the tax exemption should prefer munis over investment-grade corporates."
But given the damage to municipal governments' coffers during COVID-19, it seems very likely that their fate doesn't just rest on economic rejuvenation, but economic stimulus.
"If a plan includes funding for state and local governments, we would expect municipal bonds to benefit," write analysts at the Wells Fargo Investment Institute. "Municipal bonds saw a rotation out of favor as the COVID-19 crisis worsened, so stimulus supporting local governments may represent an attractive opportunity to rotate back into them."
The Vanguard Tax-Exempt Bond ETF (VTEB, $55.07), then, could be one of the best bond ETFs for 2021 – but that could be heavily impacted by whether local governments receive any sort of bailout.
Vanguard Tax-Exempt Bond ETF is a low-cost way to pile into a boatload of muni bonds – 4,908, to be exact. This wide portfolio is almost entirely investment-grade, with more than three-quarters spread across the two highest grades (AAA and AA). Average duration is similar to EMLC at 5.4 years.
The yield, at 1.2%, isn't much to look at, but it's at least a little more than it seems. Remember: That income is at the very least exempt from federal taxes, and depending on what state you live in, some of it might be exempt from state and local taxes, too. But even based on the federal break, that 1.2% comes out to a "tax-equivalent yield" of 1.9%, meaning that a regularly taxable fund would have to yield at least 1.9% to deliver 1.2% after taxes for you.
BlackRock Ultra Short-Term Bond ETF
- Type: Ultrashort bond
- Assets under management: $4.9 billion
- SEC yield: 0.35%
- Expenses: 0.08%
The BlackRock Ultra Short-Term Bond ETF (ICSH, $50.51) isn't really about income – it's about protection.
When interest rates rise, investors will often sell their existing bonds with lower yields to buy the newer bonds with higher yield. The longer the maturity of the lower-yielding bond – and thus the longer an investor would be collecting interest on that bond – the more enticing the newer bonds look, and thus the higher the interest-rate risk to the old bonds.
But extremely short-term bonds don't have this issue, as even large changes in interest rates won't really change returns much. Add in a scenario like 2021, where the Federal Reserve is expected to stay put, and it's very likely that short-term bonds will barely move – again.
Case in point? The BlackRock Ultra Short-Term Bond ETF. This fund holds various investment-grade fixed- and floating-rate bonds, as well as money-market instruments, with average maturities of less than a year. That results in a duration of just 0.43 years, which means a whole percentage-point change in rates would only knock ICSH down by less than half a percent.
At its absolute worst in 2020, ICSH lost about 3.5% of its value – a blip compared to what most stocks did. It recovered fast, too, and has even managed to eke out a 1%-plus gain through mid-December.
BlackRock Ultra Short-Term ETF won't make you rich – that's not the point. But in the event of an emergency, it could keep you from going broke. And its overall returns typically beat out the average money market fund, making it a strong option for parking your cash if you suspect a downturn is imminent.
GraniteShares Gold Trust
- Type: Gold
- Assets under management: $1.1 billion
- Dividend yield: N/A
- Expenses: 0.1749%
Another popular source of both portfolio diversification and safety is gold. Though most investors are going to have an easier and cheaper time buying it via exchange-traded funds rather than deal in the physical metal itself.
Gold, which is priced in U.S. dollars, usually is utilized as a hedge against inflation and against calamity in general. That latter point doesn't bode well for gold, given that experts broadly expect the global economic situation to improve in 2021. But analysts are nonetheless pointing to a productive 2021 for the commodity.
"The direction of the U.S. dollar typically determines whether commodities may be stronger, stable or weaker," say Invesco's Levitt and Léger. "History suggests that a softer currency is generally associated with firmer commodity prices, and we expect this time to be no exception. We expect ongoing Fed dovishness and continued efforts to maintain easy financial conditions to weaken the U.S. dollar and provide support to commodities."
"The dollar's precipitous decline, forecast to continue into 2021, provides ample opportunity for gold to catch up as the world contends with the aftermath of the Fed's printed economy, falling real yields and rising inflation expectations," adds Will Rhind, CEO of fund provider GraniteShares.
Many gold ETFs are designed to do what Rhind's GraniteShares Gold Trust (BAR, $18.17) does: provide exposure to gold prices via shares backed by real physical gold stored in its vaults.
But it doesn't get much cheaper than BAR. The ETF, whose shares each represent a tenth of an ounce of gold, costs less than established rivals such as the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) – BAR is 56% and 30% cheaper, respectively. In fact, GraniteShares is largely to thank for helping to lower expenses in a category that long went unaffected by fund-provider fee wars.
That low cost allows investors to enjoy even more of gold's potential upside.
ProShares Short S&P500 ETF
- Type: Inverse stock
- Assets under management: $2.0 billion
- Dividend yield: 0.6%
- Expenses: 0.90%
The ProShares Short S&P500 ETF (SH, $18.51) is one of the few funds that have made our Best ETFs list for a third straight year. But how did it merit inclusion after its 23% losses in 2020 through mid-December?
Easy: It gained 35% through March 23.
The point of this list is to make sure you're prepared for whatever the market sends your way. Long-term, it makes sense for most investors to stick with a buy-and-hold plan through thick and thin, collecting dividends along the way. If you hold high-quality stocks, they'll likely bounce back after any market downturn. But we're only human, and in market environments like what we saw in spring 2020, you might feel pressured to cut bait.
If you're wrong, you're potentially sacrificing great cost bases, not to mention attractive "yields on cost" (the actual dividend yield you receive from your initial cost basis), on the stocks you've jettisoned.
One alternative is ProShares' SH – a tactical ETF for investors looking to hedge against stock-market downside. The fund provides the inverse daily return of the S&P 500. In short, that means if the S&P 500 declines by 1% on Monday, the SH will gain 1% (minus expenses, of course).
You don't buy and hold this fund forever. You simply invest a small percentage of your portfolio in it when your market outlook is grim, and by doing so, you offset some of the losses that your long holdings incur during a down market. The risk is that if you're wrong, and stocks go up, your portfolio gains won't be as robust.
Some investors who looked around in January and February and realized COVID-19 could do to the U.S. what it was doing to China jumped into ProShares Short S&P500 ETF and were well-rewarded for their pessimism. From the market high in February through the March nadir, SH gained a little more than 42%. Even investors who only rode SH part of the way down secured some much-needed protection.
Many buy-and-hold investors will do just fine simply staying the course. But if you like to be a little more involved and want to fade potential downside in the future, SH is a simple, effective hedge.