Here are seven top ETFs to consider for your portfolio in 2021 based on their performance in 2020.
How ETFs work
ETFs are funds that hold a group of assets such as stocks, bonds or others. Their shares trade on an exchange like a stock, and they allow investors to acquire an interest in all the fund’s holdings by buying just one share. The minimum cost to get into the market is just the cost of one share, often in the range of $20 – $200. So it doesn’t require a massive investment to start.
Since many ETFs hold such a broad array of stocks, they’re often considered diversified, helping protect investors from a drop in any single stock. That’s especially true for broadly diversified ETFs – such as those based on the Standard & Poor’s 500 index – because they hold shares across every industry. But it’s less true for narrowly focused funds, such as those based on a single industry or country. This diversification is a key advantage of ETFs over individual stocks.
While they trade on a stock exchange, ETFs can give you exposure to almost any kind of asset. Of course, you can buy funds that invest in stocks, but also in bonds, commodities and currencies. You can even find a fund that invests in the volatility of the major indexes.
There’s also another type of ETF called a leveraged ETF, which is designed to provide double or triple the exposure to the underlying investment. They aim to track the daily performance of their stocks, so if the stocks go up 1 percent, these ETFs are supposed to go up 2 percent or 3 percent, depending on the type of fund. But they also go down a similar amount, too, if the stocks move that way. In addition, leveraged ETFs have other risks that investors should pay attention to, and these are not the best securities for beginning investors.
(Investors looking for more conservative funds should check out these ETFs.)
Is an ETF a good type of investment?
ETFs tend to have very low expense ratios – the cheapest funds cost just a few dollars for each $10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it.
Another huge boon for investors is that most major online brokers have made ETFs commission-free. That means you can get into and out of the market without paying trading fees, another benefit over individual stocks, making ETFs even better for cost-conscious investors.
7 top ETFs for 2021
Here are seven top ETFs for 2021 that investors may want to consider, based on their recent performance, their expense ratio, and the kind of exposure that they offer investors.
Top tech ETF – Invesco QQQ Trust (QQQ)
2020 performance: +48.4 percent
Expense ratio: 0.20 percent
The Invesco QQQ Trust owns only non-financial Nasdaq stocks, making it a tech-heavy fund with the big names that you’re probably already familiar with. The ETF is one of the largest around, so it’s tremendously liquid. It’s not too expensive either, with the fund costing $20 annually for every $10,000 invested. The solid performance in 2020 reflected the broader market of tech names that soared.
Top S&P 500 ETF – Vanguard S&P 500 ETF (VOO)
2020 performance: +18.3 percent
Expense ratio: 0.03 percent
The Vanguard S&P 500 ETF tracks the S&P 500, providing a broad-based, diversified portfolio of the largest American companies. The fund is sponsored by one of the leaders in low-cost ETF investing, Vanguard, and the fund itself has hundreds of billions in assets. The fund was opened in 2010, and has a razor-thin annual cost of just $3 for every $10,000 invested. The solid performance in 2020 reflects the market’s overall gain.
Top high-dividend ETF – Vanguard High Dividend Yield (VYM)
2020 performance: +1.1 percent
Expense ratio: 0.06 percent
This Vanguard ETF tracks the FTSE High Dividend Yield Index, which includes American stocks paying high-dividend yields. The fund has tens of billions under management, making it highly liquid, and it’s sponsored by one of the most reputable names in the business, Vanguard. The fund was founded in 2006 and charges just $6 for every $10,000 invested, so it doesn’t cut into the meaty dividend payout too much.
Top entertainment & leisure ETF – Invesco Dynamic Leisure and Entertainment ETF (PEJ)
2020 performance: -10.3 percent
Expense ratio: 0.63 percent
This fund was down in 2020, largely due to the pandemic, which hit many entertainment and leisure companies hard. But with a vaccine being rolled out, 2021 may signal a turnaround for this fund, which holds leading media, hotel and restaurant companies. This ETF is relatively small and charges a higher expense ratio than many funds here, costing $63 for every $10,000 invested. In the 10 years prior to September 2020, it has returned about 8 percent annually, so 2020’s dip may set you up for better forward returns.
Top gold ETF – VanEck Vector Gold Miners ETF (GDX)
2020 performance: +23.7 percent
Expense ratio: 0.52 percent
Investors often turn to gold in times of uncertainty, and one way to play it is by owning gold miners instead of the shiny stuff itself. Owning the miners gives you more upside if gold prices rise (and more downside if they fall), and that’s what this VanEck fund offers. It’s among the largest gold miner ETFs out there, and charges $52 annually for every $10,000 invested in the fund. Its five-year performance through September 2020 was an average of 21 percent annually. So this fund could be a hedge for the rest of your portfolio if the markets get choppy.
Top small-cap ETF – Vanguard Small-Cap ETF (VB)
2020 performance: +19.2 percent
Expense ratio: 0.05 percent
Small-cap stocks are an attractive place to invest, and this Vanguard ETF allows you to own them without having to pick the winners. It holds around 1,400 positions, making it broadly diversified, but it’s among the lowest expense ratios on our list. It costs just $5 per year for every $10,000 invested. The fund was founded in 2004 and returned an average of more than 8 percent annually over its first 15 years. The performance in 2020 reflects the strong performance of smaller companies in the stock market.
Top VIX ETF – ProShares VIX Short-Term Futures ETF (VIXY)
2020 performance: +10.9 percent
Expense ratio: 0.87 percent
This ETF is unusual in the fund world, because it allows investors to profit on the volatility of the market, rather than a specific security. If volatility moves higher, this ETF increases in value, generally moving inversely to the direction of the stock market. It’s better as a short-term trade than a long-term investment, however, because it has to roll derivatives contracts regularly, costing the fund money over time. Despite relatively few assets, the fund is liquid, and its expense ratio is in line with others in this niche space – costing $87 annually for each $10,000 invested. The volatile performance of the stock market in 2020 led to a decent performance for this ETF.
Protect yourself from inflation with ETFs
Inflation is the persistent increase in prices over time, and it gradually reduces your purchasing power. As the economy re-opens following the COVID-19 shutdown, business and consumers have rushed to spend, pushing prices on many goods and services higher. To protect yourself from inflation, you need investments that rise faster than it does. And one way to do that is to actually own the businesses – or stock in them – that benefit from inflation.
Often the beneficiary is a high-quality business that can push on those rising prices to consumers. By owning a stake in the business – through stock or a collection of stocks in an ETF – you can benefit when your companies raise their prices. So owning stock can be a way to protect yourself from inflation.
Investors have a good choice of ETFs when it comes to hedging against inflation. Two of the best ETFs include index funds based on the Standard & Poor’s 500 index and the Nasdaq-100 index, which contain high-quality businesses listed on American exchanges:
- Vanguard S&P 500 ETF (VOO), with an expense ratio of 0.03 percent
- Invesco QQQ Trust (QQQ), with an expense ratio of 0.20 percent
Both are low-cost funds that give you stakes in some of the world’s best companies, helping protect you from inflation.
What to know about crypto and ETFs in 2021
Currently, there are no ETFs that allow you to invest directly in Bitcoin or other cryptocurrencies. Several companies, including Fidelity, have applied with the Securities and Exchange Commission (SEC) to offer Bitcoin ETFs, but the agency has been slow to approve them. In a recent statement, the SEC questioned whether the Bitcoin futures market could support the entry of ETFs, which aren’t able to limit additional investor assets if a fund were to become too large or dominant.
However, there are ETFs that invest in companies using the technology behind Bitcoin, known as blockchain. These ETFs hold shares in companies such as Microsoft, PayPal, Mastercard and Square. All of these companies use blockchain technology in different parts of their businesses. One thing these ETFs don’t give you is direct exposure to Bitcoin itself, but as blockchain technology continues to grow, the companies in these ETFs could benefit.
It’s unclear when or if ETFs that invest in Bitcoin or other cryptocurrencies directly will be available for purchase. It’s important to remember that cryptocurrencies are highly speculative investments and don’t produce anything for their owners. ETFs that focus on blockchain may ultimately be a safer way to profit from its future innovation.
ETFs can be one of the easier and safer ways for investors to get into the stock market, because they offer immediate diversification, regardless of how much you invest. To get started, you’ll want to open a brokerage account, one that’s especially focused on the needs of ETF investors.
Written by James Royal, Senior investing and wealth management reporter
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