As 2020 ends, it’s clear that exchange-traded funds (ETFs) have become a popular way to invest. Like any investment product, things are always changing. Keeping an eye on ETF trends can help investors make better decisions, although nothing is guaranteed and all investing carries risk.
ETFs are securities that involve a collection of stocks or other assets. ETF shares can be traded on stock exchanges, and their prices change throughout the day, unlike mutual funds whose prices are only updated once a day.
Any discussion of ETFs would be incomplete without mentioning the concept of an expense ratio.
All ETFs come with expenses. The cost can vary depending on the type of fund and what investments it holds, but in general, investors pay a premium for the privilege of holding a security that provides broad market exposure, diversification, and easy access.
The costs associated with managing a fund combined with the fund’s transaction costs are what add up to an expense ratio that must be covered by investors.
The fund’s expenses for investors gets expressed as a percentage that is calculated by dividing the fund’s total costs by its total assets under management (AUM). This percentage represents the amount of investor funds that will be extracted from shareholders.
A fund with a 1% expense ratio, for example, would charge $1 per every $100 dollar invested each year.
Passive funds tend to have lower expense ratios than actively managed funds.
2021 ETF Trends
1. Actively Managed Funds Could Grow in Number
Most ETFs are passive investments, meaning the teams who manage them don’t take an active role in buying and selling securities on a frequent basis. Passive ETFs simply try to track a market index or industry and match its overall performance.
Active ETFs, by contrast, have portfolio managers who seek to capitalize on price volatility by buying low, selling high, and repeating the process. The goal of active managers is to outperform the market.
The track record of anyone beating the market is not good. It’s estimated that very few investors beat the market over the long run.
Still, active ETFs have been growing in popularity, as the idea of seeing greater than average returns appeals to most investors, even if the risk is high.
2. Corporate Bond ETFs Could Rise
This section should be premised with the fact that corporate bonds tend to come with very high risk. As far as debt instruments are concerned, these bonds are among the riskiest on the market.
Why do investors take on risks like these?
For one, corporate bonds can have high yields. That means that investors who hold them receive interest payouts on a quarterly or monthly basis.
In 2020, the Federal Reserve (the central bank of the United States) has stated that it intends to purchase corporate bond ETFs. With the coronavirus pandemic and associated lockdowns reducing revenues across the board, many corporations might struggle to meet their debt obligations.
To prevent widespread defaults, the Fed has pledged to step in and buy these bonds as an added stimulus measure.
This trend is a little different than the other ETF trends on this list because it has more to do with central bank intervention than any fundamental trend among investors.
Since the financial crisis of 2008, central banks have printed many trillions of dollars to keep economies afloat. In 2020, the money printing (also known as stimulus or quantitative easing) has really kicked into high gear, with record amounts of stimulus measures being taken over a short amount of time.
When central banks create currency to purchase assets, it’s hard to see those assets losing value, at least until the stimulus programs come to a halt.
3. Healthcare ETFs Could Continue To Grow
Many healthcare ETFs are well-positioned for continuing growth into the year 2021. Healthcare has been a growing industry for quite some time, with US healthcare expenditures reaching $3.6 trillion in 2018.
Two big reasons healthcare continues growing are due to an aging population and new ground-breaking discoveries in medical treatments and health-care related technology.
There are plenty of healthcare ETFs to choose from, and many of them have low expense ratios of around 0.75% or less. Some of the things these ETFs specialize in include research and development of genetic medicine, manufacturing of medical devices, or foreign healthcare stocks.
4. Emerging Markets Could Outperform
Emerging market economies (EMEs) tend to carry high risks with the potential for outstanding rewards. That’s because economies of this nature are thought to be in a state of rapid growth with ample opportunity for rewarding investment.
China has the second largest economy in the world and is considered to be the dominant player in emerging markets. There are many emerging market ETFs out there to choose from, and several that specialize in Chinese companies.
China could eclipse the US as the world’s largest economy at some point in the near future.
5. Tech Could Continue to Influence Trends
Technology has always been a fast-growing, innovative industry. If there’s one thing that 2020 taught us, it’s that tech stocks can outperform even during the worst of times.
2020 saw brands in the video conferencing, home exercise, and esports and video gaming space soar to unbelievable new heights.
Due to people spending more time at home, brands that might have once been little more than a blip on the radar became superstars almost overnight.
It’s hard to see this trend not continuing into 2021. While people have started going outside more than they did during the first half of 2020, some of the behavioral changes could remain.
For example, people who got into gaming might continue their adventures in virtual worlds. Some individuals who have become accustomed to working out at home might continue doing so.
And while usage of video conferencing software probably isn’t what it was during the height of lockdown season, the tech still has a large use case given that many office buildings probably won’t be back open for business anytime soon.
Even if these specific trends were to reverse, odds are other tech-induced trends would take their place. That has been the nature of this industry for a long time: evolution and innovation.
6. Gold ETFs Could Shine
One of the big ETF trends for 2021 might be gold mining stocks.
In 2020, the price of gold hit a new record high against the US dollar. For the past several years, gold has been making new record highs in many different currencies all over the world. Silver has also performed well, although it did not make new highs in dollar terms.
Gold and silver are widely regarded as “safe haven assets,” meaning investors often flock to them during times of uncertainty. It’s not surprising that assets like these performed well in 2020 amidst unprecedented global turmoil.
It’s not difficult to see how this could be a bullish development for many companies involved in the exploration and mining of gold and silver. If the product they produce can be sold for higher prices, then their profits could rise.
Many mining stocks have done extraordinarily well in 2020, and there are several related ETFs for investors to choose from.
With interest rates near zero or even lower (there are at least $15 trillion worth of bonds in the world that have negative interest rates as of 2020), investors may want to consider assets like gold—and therefore mining stocks, too—that have a good record of preserving wealth. On a related note, increased interest in the electric auto industry has put a spotlight on lithium mining.
7. Demand for Renewable Energy Could Continue
Along with passive investment options like ETFs and robo-advisors, one of the biggest new trends in the investment world involves something called “socially responsible investing.”
The idea is to invest in companies that have a positive social impact. Investors might choose a company that gives back to its local community based on this principle. Or they might avoid companies in the oil and natural gas sectors, opting instead for renewable energy stocks.
Currently, there are 10 renewable energy ETFs on the market. Altogether, their assets under management equals $7.76 billion, and the average expense ratio is 0.62%.
Investing for the Future
SoFi Invest® offers investors easy access to many of the biggest ETFs on the market. Building a low-cost, diversified portfolio with SoFi can be done with zero transaction fees and no account minimums.
Using the SoFi app makes it easy for investors to keep an eye on their stocks and keep up-to-date on investing news.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, please visit www.sofi.com/legal.