25 January 2022

6 Predictions for the ETF World in 2021

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The year 2020 as a whole could easily be attributed to the COVID-19 outbreak, the resultant lockdown and economic sufferings, but some real relief came in the fourth quarter. Back-to-back positive vaccine updates and Joe Biden’s win with a divided Congress (so far assumed) boosted markets in November.  

The winning spree continued in December with Trump’s signing of the second round of a virus stimulus deal. Overall, Wall Street is hovering at record highs with global markets too moving along. The S&P 500, the Dow Jones and the Nasdaq Composite added about 14.6%, 6% and 41.8%, respectively, in the past one year (as of Dec 31, 2020).

This is the situation in which we are entering 2021 and can see some important ETF trends are emerging with full force.

Oil Prices Likely to Remain Range Bound Despite Vaccine Rollout 

Several factors including OPEC’s output decision and shale production will rule the oil market in 2021. As of now, shale output is rising with falling costs of hydraulic fracturing or “fracking,” and rising commodity prices.

Per a Forbes article, a recent survey by the Dallas Federal Reserve reported that shale firms needed less than $30 a barrel in most fields to make up for their operating expenses for existing wells. Companies could operate profitably in West Texas’ Permian basin for less than $40 a barrel, including drilling costs. With the current $48-oil price, we think those companies may beef up production in 2021.

On the other hand, Iran is planning to sign agreements worth $1.2 billionto boost the nation’s crude output. OPEC and Russia also agreed to increase oil output by 500,000 barrels per day(BPD) in January. All these factors may result in higher oil output and could put pressure on prices even in a scenario of demand recovery. United States Oil Fund LP USO and United States Brent Oil Fund LP (BNO) should be closely tracked.

Bitcoin Likely to Rule in the First Half: An ETF in the Offing? 

The price of Bitcoin has been on a tear lately. It crossed the $20,000-mark for the first time on Dec 16 and is trading above $34,000 at the New Year. Bitcoin soared about 200% last year. Institutional interest has led to this buoyancy. The currency “will be on the road to $50,000probably in the first quarter of 2021,” said Antoni Trenchev, managing partner and co-founder of Nexo in London, one of the world’s biggest crypto lender, as quoted on Yahoo Finance.

Sergey Nazarov, the cofounder of Chainlink, said a few days back that “rising inflation and increasingly negative views of modern monetary policy are forcing investors to look for alternative ways to preserve the value of their capital,” as quoted on Businessinsider.

Corporations’ greater acceptance in allowing customers to hold bitcoin and other virtual coins in their online wallets and several central banks’ intention of rolling out digital currencies have been favoring the cryptocurrency. In fact, a bitcoin ETF could finally see the day of the light in 2021 as VanEck filed an application with the SEC lately. Notably, the SEC had earlier rejected several bitcoin ETF proposals, including an effort from VanEck.

Investors can definitely familiarize with the concept of bitcoin through blockchain ETFs like Amplify Transformational Data Sharing ETF (BLOK). ETFs offering exposure to the blockchain ecosystem via semiconductor companies that make chips for bitcoin mining (or could make for some potential CBDCs) can be played. The most-popular funds include iShares PHLX Semiconductor ETF (SOXX) and VanEck Vectors Semiconductor ETF (SMH).

U.S.-China Tensions Not to Cool Down Soon 

U.S.-China ties soured a lot in the Trump era. Even a Biden era might not give respite to the tensions.The New York Stock Exchange started delisting three Chinese telecom firms – China Mobile, China Unicom and China Telecom – that Washington believes as having military ties. China looks to resort to "necessary measures."

Analysts expectJoe Biden to adopt a multilateral approach in dealing with China on tech and trade policies. China has already started shifting its focus toward Europe having signed an investment deal.  So, keep a close watch on the China ETFs like iShares MSCI China ETF MCHI and iShares China Large-Cap ETF (FXI), though we do not expect any slump in this fund category. China’s notable success in handling the pandemic and solid growth in the field of automation and 5G will continue to keep their assets rolling in 2021.

Expect a Bank Rally in 2021 

A steepening yield curve and better economic environment bode well for banks in 2021. The Fed has given America’s most profitable banks the permission to resume share buybacks for the first quarter of 2021, even though it noted that that the country’s biggest lenders could face pandemic-related loan losses of more than $600 billion.  Soon after the Fed’s decision, JPMorgan Chase approved a new share repurchase program of $30 billion. Bank ETFs like SPDR S&P Bank ETF KBE can thus gain ahead. However, if we do not get a divided Congress, gains in bank stocks may be restricted in the short term.

Volley of New ETFs on Technological Disruption May Come On Line 

The year 2021 will be more focused on areas like Artificial Intelligence, Fintech, semiconductors and 5G. Globally, green infrastructure and digitization would be of the top-most priorities. Key economies of the world, the United States, the Eurozone and China – all will stay tuned to these areas. In the auto industry, the emergence of self-driving cars could act as a game changer. Most recently, we received a handful of new ETFs on these fields, namely – Simplify Volt RoboCar Disruption and Tech ETF VCAR, Simplify Volt Cloud and Cybersecurity Disruption ETF (VCLO) and Simplify Volt Fintech Disruption ETF (VFIN).

Small Caps May Record Double-Digit Gains Again in 2021 

The Russell 2000 Index outperformed the bigger equity gauges by a wide margin as the pint-sized stocks ruled in Q4 of 2020. The small-capitalization focused iShares Russell 2000 ETF IWM added 28.5% in the past three months, breezing past three other big equity gauges. Overall, the fund was up 18.3% past year.

Since small-cap stocks are more closely tied to the domestic economy, stimulus hopes and vaccine news boosted the segment even more. The trend is going to favor the segment throughout 2021 as economic recovery will be in process. However, one should keep a close tab on the peaks and troughs in new COVID-19 cases before investing in this area (read: Top ETF Stories of Fourth-Quarter 2020).

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