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Here's the Right ETF Mix for an Impressive New Year Portfolio

Sweta Jaiswal, FRM
·6 min read

The wind seems to be blowing in favor of the market now. Though 2020 has been roiled by the coronavirus pandemic, 2021 might see a turnaround in the U.S. economy. Despite the pandemic-led obstacles, the Dow Jones Industrial Average is up 5.8% for the year. Going on, the S&P 500 and Nasdaq Composite have gained 14.8% and 42.2% for the year, respectively.

Factors Fueling Optimism for 2021

Congress finally reached an agreement on a coronavirus stimulus deal, just in time before a shutdown deadline, according to a CNBC article. The bill, which includes another round of stimulus checks and additional unemployment benefits, will be soon put to vote in the House and the Senate, per the sources. The optimism surrounding the new stimulus package is again presenting a very favorable case for the bull market in 2021 amid the worsening outbreak and its impacts on the U.S. economy.

Moreover, the chances of a divided Congress in the United States seem more likely, where Republicans can continue to control the Senate and Democrats, the House. Thus, as a result of this political gridlock, major and stringent changes in the corporate tax policies will be very difficult to implement in the medium-term. Thus, easing worries regarding major policy changes are making the investing environment friendlier for market participants.

The beginning of the process to inoculate people is adding hugely to the optimism. Moderna (MRNA) has started shipping its first batch of the coronavirus vaccine after it received an emergency use authorization from the FDA. Notably, the FDA’s Vaccines and Related Biological Products Advisory Committee had overwhelmingly supported Moderna’s coronavirus vaccine and voted 20-0 with one abstention, per a CNBC article.

Moreover, Fed’s maintenance of low interest rates and its stand on the inflation-related policies are expected to fuel the bullish sentiments. Thus, Meghan Shue, head of investment strategy at Wilmington Trust, told CNBC’s “Trading Nation” that “we’re the most bullish on the market that we’ve been in about a year,” per a CNBC article.

Moreover, Adam Crisafulli, founder of Vital Knowledge, has expressed optimism on the market by saying that “in the eyes of stocks, the inexorable vaccination process, which is only just getting started, is more powerful than the current trends in cases and lockdowns, and this will prevent markets from delving too deeply down a well of pandemic despair. Recall, the three pillars of the rally all remain very much in place: vaccines, strong corporate earnings, and massive stimulus,” according to a CNBC article.

ETF Areas for Your New Year Picks

Here we highlight some ETF areas that investors can consider to make a strong and impressive portfolio this New Year:

Industrial ETFs

The industrial sector, which faced disruption in global supply chains and closedown of factories, is expected to rebound as the economy recovers from the coronavirus-led slowdown. The introduction of a coronavirus vaccine and addition of stimulus are expected to drive demand and economic activities in the sector.

In such a scenario, investors can take a look at The Industrial Select Sector SPDR Fund XLI, Vanguard Industrials ETF VIS, iShares U.S. Industrials ETF (IYJ) and Fidelity MSCI Industrials Index ETF (FIDU) (see all industrial ETFs here).

Small Cap ETFs

Small-caps stocks, as indicated by the Russell 2000 Index, have been outperforming the broader market and hitting new all-time highs. The upside is being largely led by small-cap companies that are closely tied to the U.S. economy and thus are well-positioned to outperform when the economy improves. These stocks generally outperform on improving U.S. economy. The latest developments are expected to result in an improving economy. Therefore, investors can consider Schwab U.S. Small-Cap ETF SCHA, SPDR S&P 600 Small Cap ETF SLY, Vanguard S&P Small-Cap 600 ETF (VIOO) and John Hancock Multifactor Small Cap ETF (JHSC) (read: Grab These ETFs Now for an Impressive Finish to 2020).

Emerging Market ETFs

Along with coronavirus vaccine development and introduction of another round of stimulus, there are other factors that are presenting a very strong case for emerging market ETFs. An impressive rally in this ETF area was observed on the back of a weak dollar against the basket of currencies that has been attracting more capital into the emerging markets. The greenback is anticipated to remain under pressure in the short term given the trillions of cheap money flowing into the economy and the prospect of further easing. Going on, a Biden administration is expected to reduce uncertainty in international trade policy as well as decrease trade tensions with China, per the sources.

Given the huge potential in emerging markets, we have highlighted some ETFs for gaining exposure to the same:iShares Core MSCI Emerging Markets ETF IEMG, iShares MSCI Emerging Markets ETF EEM, Schwab Emerging Markets Equity ETF (SCHE), SPDR Portfolio Emerging Markets ETF (SPEM) and WisdomTree Emerging Markets Equity Income Fund (DEM) (read: Emerging Markets Hit Record High: 5 Top-Performing ETFs YTD).

E-commerce ETFs

The pandemic has provided a push to the e-commerce industry as people continue to prefer staying indoors and shopping online for all essentials, especially food items. Keeping up with the digitization trend, the upcoming U.S. holiday season is expected to see a significant surge in online sales.

Per the latest data from National Retail Federation (“NRF”), an estimated 186.4 million Americans shopped in-store and online during the Thanksgiving weekend (from Thanksgiving through Cyber Monday). The figure was higher than 165.8 million in 2018 but below last year’s 189.6 million. Online-only shopper count rose 44% during the weekend to 95.7 million. Black Friday and Saturday also witnessed impressive growth in online activity. The number of online Black Friday shoppers passed the 100-million mark for the first time, up 8% from last year. The number of online Saturday shoppers also rose 17% year over year.

Going by a Statista report, the global e-commerce market is expected to generate revenues of $2.4 trillion in 2020. The figure is expected to touch $3.3 trillion by 2025, seeing a CAGR of 7.4% between 2020 and 2025.

Against this backdrop, let’s look at some ETFs that can benefit from the new shopping trend -- Amplify Online Retail ETF IBUY, ProShares Long Online/Short Stores ETF CLIX, ProShares Online Retail ETF (ONLN) and Global X E-Commerce ETF (EBIZ) (read: 3 Sector ETFs & Stocks to Shine Despite Soft November Retail Sales).

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Vanguard Industrials ETF (VIS): ETF Research Reports
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Amplify Online Retail ETF (IBUY): ETF Research Reports
SPDR S&P 600 Small Cap ETF (SLY): ETF Research Reports
Schwab U.S. SmallCap ETF (SCHA): ETF Research Reports
ProShares Long OnlineShort Stores ETF (CLIX): ETF Research Reports
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Zacks Investment Research
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