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Here are the top performing ETFs of 2020

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Yahoo Finance’s Alexis Christoforous and Todd Rosenbluth, Head of ETF and Mutual Fund Research at CFRA, discuss the top performing ETFs of 2020 and which ETFs to watch in 2021.

Video Transcript

ALEXIS CHRISTOFOROUS: Investors continue to pour their money into exchange traded funds. In fact, ETF inflows for this year climbed ever closer to record highs this week as investors added another $12.6 billion to the space. Here to talk about it now is Todd Rosenbluth. He is head of ETF and Mutual Fund Research at CFRA.

Todd, good to see you. So I want to look ahead to 2021, but first, give me a feel for what this year has been like when it comes to ETFs. Where specifically have people been putting their money?

TODD ROSENBLUTH: So it's been a really great year for ETFs in 2021. A couple of key themes that have stood out, we already have had record inflows to fixed income ETFs, assuming that the year close where it is, and we're likely to see even more money going in investment grade corporate bonds ETFs, like LQD and HYG and JNK were particularly popular. We've seen thematic oriented ETFs, those that are tied to clean energy such as ICLN, which is iShares Global Clean Energy, Invesco Solar ETF, which is TAN, those are a couple of the examples of ETFs that have been quite popular and strong performing this year, and cloud computing ETFs, such as Global X's Cloud Computing, CLOU.

I guess the third theme, if I can do quickly, is ESG has been popular as well, iShares being a leader in that space. But other firms, such as Vanguard and EWS, have had success with asset gathering. And ESG is still in the early innings, and we think we're going to see continued inflows heading into 2021. I see you're showing ESGU on the screen, which is the largest of those ETFs, extremely popular, and it's outperforming the S&P 500.

You tend to think you're going to give something up with ESG, but you're actually not. They're actually performing quite well. So those are some of the themes that have really resonated with investors. And just real quick if I can, you touched on we are likely to finish the year with a record of overall flows. Equity ETFs have been popular in November and December, and we're likely to see investors continue to use tax harvesting to shift into ETFs to be able to benefit and finish the year, perhaps on the highest note ever relative to prior years.

ALEXIS CHRISTOFOROUS: So tell me, I mean, you deal with both ETFs and mutual funds. Are you seeing money flow out of mutual funds and flow into ETFs? I mean, where do things stand when you compare the two asset classes right now?

TODD ROSENBLUTH: That's certainly the case. We've seen money moving out of actively managed, in particular, US equity mutual funds. Nearly the same amount of money that's gone out of active equity mutual funds has gone into active-- I'm sorry, not active, index based or just total ETFs, including some of the active ETFs like Ark Innovation, but also mostly index based products tied to the S&P 500 and others. It's in fixed income where we've seen investors have more confidence in both actively managed mutual funds as well as actively manage fixed income ETFs from PIMCO, from JPMorgan, to name a handful of the firms that are having success. But mutual funds, we're seeing the loyalty stay within fixed income, whereas investors don't want to pay that premium to underperform as they historically have with active mutual funds, and they're shifting to an alternative such as a lower cost index based product.

ALEXIS CHRISTOFOROUS: As you look ahead to the first half of next year, you ticked through a couple of these already, but hoping you can expand on it, what are two or three themes you see for ETF investing in the first six months of the new year?

TODD ROSENBLUTH: So a couple of things that we're watching at CFRA is smart beta investing and international investing, so let me tackle those independent. This was a really bad year in 2020 for smart beta strategies. You would have been very happy if you owned the S&P 500 index with IVV, [INAUDIBLE], or SPY or VOO, it was up more than 14% through November, has continued to have a good start to December, and more alternatively weighted products, such as NOBL, from ProShares, an equally weighted version through Invesco, the S&P 500 RSP has underperformed. We think market breadth has widened and is likely to continue to widen in 2021, and that's a positive for these more alternatively weighted ETFs. JHML from John Hancock is another one. So we think SmartBank is going to be worth paying attention to and following in 2021.

The second theme, as I mentioned, is international equity investing. More money is going into US equity products. The US market has outperformed developed international. There often is a reversion to the mean that takes place. Investors are underweighted international equity given the underperformance, and we think we're going to see investors rotating in to some of the international products to start the year, whether that's broadly diversified ETFs, like IXUS, which is an iShares international ETF, or VEA, which is a Vanguard developed international ETF, or something more targeted to individual countries. But we think we're going to see international investing have a chance for outperformance in 2021 and likely also to see investors put money to work into these products.

ALEXIS CHRISTOFOROUS: All right, great insights there for the new year. Tom Rosenbluth, Head of ETF and Mutual Fund Research at CFRA, thank you.

TODD ROSENBLUTH: Thank you.