Financial advisers are in the trenches when it comes to making sense of the markets and finding the right investment solutions for the various investment objectives of clients.
With that in mind, as we approach a new calendar year, we ask some of them what concerns them most about their ETF universe.
Here, three advisors share some of their top ETF picks and top investing ideas for 2021.
Sam Huszczo, Founder and Investment Advisor, SGH Wealth Management, Southfield, Michigan
The best choice: Invesco S&P SmallCap Quality ETF (XSHQ)
We see the quality factor of small cap stocks as a modern refresh of the size factor in the making of Fama-French 2.0.
The empirically verified size factor, which refers to mid- and small-cap stocks typically outperforming large-cap stocks, has disappeared since the early 1990s in part due to increased competition. This dilution is apparently restored if the more junk addicts can be controlled by looking at metrics such as quality of earnings and leverage.
By avoiding “lottery ticket” actions in the small cap space, the robust size premium is present through more historical time periods, across different industries and different size measures. This, along with 2020 being dedicated to mega-cap stocks, gives us assurance that small-cap stocks will continue the progress they made in Q4 2020 and further narrow the gap to large caps going forward. .
Matt Carvalho, chief investment officer, Cardinal Point Wealth Management, in San Jose, California
The best choice: ARK Innovation ETF (ARKK)
Coming out of the carnage of Q1 2020, we wanted to introduce a satellite component in our clients’ holdings, which focused on certain areas that could see exponential changes from what we saw as dramatic changes in our economy. Last April, we added ARKK as a have for several reasons.
Considering a rapidly changing economy, we estimated that adoption rates could rapidly increase in areas such as e-commerce, telemedicine, and blockchain technologies – these are some of the fund’s main areas of focus. .
Beyond the Tesla headlines for which the fund is well known, what has been remarkable to observe is the growth of companies like Moderna, Square and DocuSign. None of these four companies have been included in the S&P 500 Index so far, so investors who thought they were well diversified may have missed out on their performance.
Second, we felt comfortable with a high conviction fund as a more modest addition to our core broad market allocation. This fund has the potential to shake things up in terms of performance and does not constitute a watered-down exposure to these themes.
Finally, we like the fact that the fund’s portfolio manager, Cathie Wood, has assembled a diverse group of managers and analysts and has been very transparent in her research and thinking; all of which we hope to see more from the industry in the future.
It will be difficult to continue the magic of 2020 for this fund, but when you look at their track record and unique holdings, the potential is at least there.
Marguerita Cheng, CEO, Blue Ocean Global Wealth, Gaithersburg, Maryland
FTCS is a large-cap, core fund that invests in companies with the strongest balance sheets. These are quality actions. It is a basic asset.
CIBR invests in cybersecurity. We need cybersecurity to allow individuals to access information in a safe and secure manner. It is an exploitation of opportunity
Cyber security is the protection of Internet-connected systems such as hardware, software, and data from cyber threats. This practice is used by individuals and businesses to protect against unauthorized access to data centers and other computerized systems. CIBR enables clients to access cybersecurity businesses with diversification and transparency.
Graphics courtesy of StocksCharts.com
Overall themes for 2021
Andrew Musbach, Co-Founder and Financial Advisor, MD Wealth Management in Chelsea, Michigan
The most important theme for 2021 concerns small cap and value stocks. Historically, the value of small caps as an asset class has produced the highest long-term average returns. Of course, the caveat is that you had to be extremely patient to achieve those higher returns, including enduring long periods of underperformance interspersed with periods of outperformance.
Keep in mind that the reason why small cap and value stocks tend to perform better over time is due to two relatively simple concepts: First, the idea that risk and reward are correlated. If you take more risk (that is, by investing in smaller “riskier” companies), you should be rewarded with a higher return. Second, the idea of buying stocks at a discount. If you buy a stock when it’s “on sale” (value) and pay for it relatively low, you should realize higher returns later.
On the first point, if you are thinking of lending money to a business, would you rather lend it to Amazon or a small business that you have never heard of? Most people would choose Amazon, and because of this investors should be encouraged to choose the alternative. Risk and reward tend to be correlated, and the market must reward investors who take more “risk” by investing in smaller companies.
Regarding the second point, people often confuse investing in a good business with achieving a good return on investment. In other words, people ignore the impact of the price at which they buy an investment on their subsequent return. Just as you would have achieved better returns on your investment in 2020 if you had invested when the market was temporarily down 30% or more from its peak, so does buying stocks at a relatively valuation. lower.
Over the past decade, large US growth and technology companies, as a group, have had the best relative outperformance. This created an opportunity whereby valuations made small cap value companies particularly attractive on a relative basis going forward. We have already seen the previous trend start to reverse from the market bottom on March 23, and based on current relative valuations, as well as historically higher expected returns for the small cap value, it should continue to do so. have a great opportunity in space.
Contact Cinthia Murphy at [email protected]