By Jeff Reeves
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 /zigman2/quotes/210598364/realtime NDX +0.63% increased roughly 44%, its fifth-best year ever. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.48% 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 /zigman2/quotes/210598065/realtime DJIA -1.50% , 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.
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 /zigman2/quotes/204332491/composite MJ -1.27% is the largest and most established with almost $1 billion in assets. Its biggest holdings include Aphria /zigman2/quotes/207425803/composite APHA -2.09% and Canopy Growth /zigman2/quotes/200603886/composite CGC -1.39% . 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 /zigman2/quotes/220307682/composite MSOS -0.91% 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.
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 /zigman2/quotes/208054269/composite PYPL +2.33% 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 /zigman2/quotes/204158492/composite XROLF +1.40% , which offers cloud-based accounting services to small businesses, or the $75 billion powerhouse Fiserv /zigman2/quotes/204817680/composite FISV -0.79% 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 /zigman2/quotes/204444830/composite FINX -0.95% 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 /zigman2/quotes/200832456/composite EPAY -2.75% . 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.
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 /zigman2/quotes/203165245/composite T -2.58% and Verizon /zigman2/quotes/204980236/composite VZ -2.12% upgrade their networks. This includes communications chip maker Qualcomm /zigman2/quotes/206679220/composite QCOM +0.49% , networking service firm Ciena Corporation /zigman2/quotes/208745450/composite CIEN +0.62% 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.