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Wall Street closed the books on 2020 with a decidedly good year for U.S. stocks. But as is so often the case, your performance varied significantly depending on what you owned.
I’m not talking about stock-picking; picking the “right” index was just as important. Consider that for the year, the Nasdaq-100 NDX, +1.28% increased roughly 44%, its fifth-best year ever. The S&P 500 SPX, +0.55% had a pretty good year too, but its returns of about 16% were only roughly a third of the Nasdaq-100’s gains. Lagging even farther behind was the Dow Jones Industrial Average DJIA, +0.18%, up only 7% on the year.
The root cause lies in the fact that the Nasdaq-100 has more than 40% of its assets in tech and only about 2% in financial services. Full diversification obviously reduces your risk, but also prohibits you from notching big gains.
So if you’re looking for outperformance in 2021, it may be worth biasing your portfolio just a bit toward a high-growth sector. It doesn’t have to be something as vanilla as “technology,” as a universe of sophisticated funds allow investors to zero in specific trends without buying individual stocks.
Here are five such tactical sector funds that may be worth looking into to tap into significant outperformance over your standard index funds.
Marijuana ETFs
In November, voters in New Jersey, Arizona, Montana and South Dakota legalized recreational marijuana in their states. That makes 15 states and Washington, D.C., that have legalized marijuana for adults — and 36 states that allow medicinal use of marijuana. Furthermore, incoming President Joe Biden has embraced the notion of decriminalizing possession at the federal level.
This trend has captivated many investors, but volatility in individual stocks has means you could be in for a wild ride as the emerging cannabis industry struggles through its growing pains. After all, many dot-com stocks didn’t make it thanks to misreading the market or being outmaneuvered out by competitors. For those interested in playing this broader trend, then, a basket of marijuana stocks rounded up in an ETF could be just the ticket.
Among the funds in the marijuana space, the ETFMG Alternative Harvest ETF MJ, -0.71% is the largest and most established with almost $1 billion in assets. Its biggest holdings include Aphria APHA, -0.23% and Canopy Growth CGC, -1.44%. In 2020, this ETF fell 11.6%, after taking into account reinvested dividends.
A new and fast-growing ETF worth a look is direct the AdvisorShares Pure US Cannabis ETF MSOS, -0.81% that launched in September. It is actively managed and includes indirectly related companies, microcap marijuana startups and other interesting twists on this trend. The ETF is reasonably established with $250 million in assets, and could be worth a look for those looking to cast a wider net on the sector.
Read: Cannabis stocks stage strong rally as prospect of Democratic Senate spurs reform hopes
Fintech ETFs
Coronavirus created quite a disruption to the global economy in 2020, and complications still linger. However, the pandemic proved once and for all the power and portability of digital technologies. This is old news to retailers, many of whom have been feeling the pain at bricks-and-mortar stores for years, but it’s a trend other areas of the economy have been slower to embrace — including financial services.
PayPal PYPL, +3.16% may be the first name many MarketWatch readers think of in the fintech arena, as they have likely used one of its mobile payments services, including Venmo or Xoom. But fintech applications run much deeper than what consumers may see. A good example is New Zealand-based Xero XROLF, -0.23%, which offers cloud-based accounting services to small businesses, or the $75 billion powerhouse Fiserv FISV, +2.06% that provides automated compliance and fraud-protection technologies.
These kind of enterprise-oriented services always had a place, but amid social distancing and remote working, they proved their true potential to businesses — and those customers could likely double down on them in 2021.
Global X FinTech ETF FINX, +1.52% is one of the best options to look at if you believe in the fintech megatrend. This $1 billion ETF is a who’s who of the space, with big names like PayPal as well as smaller firms with a lot of growth ahead of them like digital invoicing firm Bottomline Technologies EPAY, +0.17%. There are other ETFs out there, some of which play specific trends like mobile payments or blockchain if you’re into that, but this is an established option with a lot of interesting holdings.
5G ETFs
I’m sure you’ve run across your fair share of ads that sing the praises of one wireless provider’s 5G network over the others. As an investor, you should worry more about who’s upgrading all these networks rather than which provider is truly faster.
The real opportunity here for investors is that obsolete telecom infrastructure necessarily means big business for firms helping the likes of AT&T T, -1.26% and Verizon VZ, -1.25% upgrade their networks. This includes communications chip maker Qualcomm QCOM, +0.60%, networking service firm Ciena Corporation CIEN, +1.03% and a host of others.
It remains to be seen whether Big Telecom can squeeze more profits out of all this or whether 5G is just a costly exercise in customer retention, but either way it creates a big opportunity for the companies building and maintaining next-gen telecom networks.
The First Trust Indxx NextG ETF NXTG, +1.02% is a great tactical ETF to consider if you want to play this long-term investment in telecom infrastructure and ride this growth trend in 2021. It holds a wide array of interesting names, from direct plays like chipmakers to opportunities that are a bit removed like data center and cloud-computing infrastructure giant Digital Realty Trust DLR, -0.01%. It’s also an established fund with $800 million in assets and excludes the legacy telecoms you may find in other funds.
Clean Energy ETFs
With Democrats seizing control of both Congress and the White House, climate change is firmly back on the national agenda. Europe is already well ahead of U.S. alternative energy efforts, with the European Union hammering out its Green Deal that plans to make the entire continent carbon-neutral by 2050.
Read: Electric car sales jump to record 54% market share in Norway in 2020 but Tesla loses top spot
Even the U.K., which formally left the EU thanks to Brexit, has continued on a path to a sustainable future as half of all its electricity generation was attributable to wind power in 2020.
This global focus on climate change and carbon emissions means big things for clean energy stocks, particularly names in the wind and solar space that already have seen strong interest from Wall Street over the past few years.
The most established ETF to play this trend is the iShares Global Clean Energy ETF ICLN, -0.75%, which covers companies in every geography and in every segment of alternative energy and boasts almost $5 billion in assets. Perhaps most important, while it does have some plays with vague EV applications, such as hydrogen fuel cell stock Plug Power PLUG, +13.71%, it is indeed a play on alternative energy — unlike the some funds, like the Invesco WilderHill Clean Energy ETF PBW, +0.25% that roughly tripled last year thanks to boasting Nio NIO, +8.55% as a top holding.
If you want to play EVs, there are plenty of ways to do that. But this iShares ETF is a broader play on green energy that could do very well in 2021.
Read: Here are analysts’ 10 favorite clean-energy stocks to buy now
From Paul Brandus: Electric vehicles aren’t going to take over any time soon
Biotech ETFs
Amid the coronavirus, investors were inundated with an alphabet soup of health-care funds that would purportedly allow them to profit from the pandemic. I expect the biotech fads to fall away in 2021 and the more established long-term bets on innovation and next-gen cures to shine.
At the top of the list of the best ETFs to play this megatrend would be the SPDR S&P Biotech ETF XBI, +0.22%. This biotech-focused fund is deep, with roughly 170 holdings. It’s also not market-cap weighted like other funds that rely on just two or three big picks in the space; not a single position is weighted at more than 1.2% at present. That ensures investors can tap in to the smaller names with the biggest long-term potential.
To top it off, it is incredibly liquid with almost $7 billion in assets and volume regularly north of 2 million shares daily.
Sure, this ETF rode the coronavirus trend to more than 50% gains last year. But more important is the long-term performance of more than 630% gains since the end of 2010—profits that roughly three times that of the S&P 500 in the same period. The hard reality is that the world faces a host of serious conditions, from cancer to Alzheimer’s, and the innovative medical stocks researching potential cures will remain in high demand.
Jeff Reeves is a MarketWatch columnist. He doesn’t own any of the funds in this article.
