It’s New Year’s Eve Day, that time of year when most folks spend a few hours pretending to work, watch the lackluster market and read a lot of year in review articles. We’ll have a few here, for sure, and every financial pundit in the industry is talking about the year that was and making predictions for 2021.
I suppose it’s expected that I do the same, but maybe we can dispense with the formalities and make a few interesting observations and less-than-obvious predictions for the year to come. Honestly, despite everything being awful, it was a pretty great year for the ETF Market, which puts me in mind of the picture above, which I realize will be lost on everyone under 40 years old. (He’s the mascot from an old humor magazine kids, you can google him.)
2020 in 5 (or 500) Words
It was a big year.
You don’t need an ETF nerd to point out it was a monumental year for the structure, but let’s break down some of the biggies:
- Record >$500 million in new assets, while mutual funds continue to lose assets.
- >300 new launches
- Implementation of the ETF Rule
- Record flows and launches of active strategies (daily-transparent and not)
- Record flows into ESG
On top of those milestones, ETFs thrived during the most violent sell off and recovery in history. While there were attempts to paint ETFs as villains in the heat of the downdraft, the reality is ETFs — particularly bond ETFs — did exactly what they were supposed to do even when the underlying markets locked up in panic. They provided liquidity and price discovery.
What’s more interesting than the nostalgia for a weird year, is what themes are carrying over into the new year. 2021 is a big year, for sure. New administration, a global pandemic being rebuffed by a global vaccine campaign, the slow return to some version of normal towards the summer or end of the year, etc. etc. We’ll all get to see in real time what the impacts of trillions of dollars in economic experimentation does. But investors and advisors are going to still be wrestling with some over-arching themes that I suspect will drive both performance and assets in 21:
- Anything-But-Beta. Yes, it’s fun to grab the popcorn and watch the movements of the stock savant of the moment, ARK Investment Management‘s Cathie Wood, but we’re having a bit of a moment in non-beta strategies of all types. This isn’t going to stop anytime soon. Investors are looking to position for the radical economic shifts we’re witnessing in real time, from obvious Work-From-Home angles to less-headline-grabbing trends like the changing face of transportation. 2021 will inevitably anoint new winners and losers, and the product proliferation of non-beta strategies is only going to accelerate.
- Please God Find Me Income. Whether it’s corporate bonds, preferreds or strategies that transform equities into income strategies using options, the income-hunt isn’t going away.
- Mother-May-I Protection. Strategies that let investors stay invested but provide some level of downside protection had a good year in 2020. They’re going to have a good year in 2021.
- ESG is a Thing, whether you believe in it or not. The incoming administration is sure to be more ESG friendly, and the European environment for ESG has never been stronger. ESG is going to move money, and it’s going to move security prices.
New for You
All of the above are born out in the flows we’ve seen in the second half of 2020, and in the performance and media focus we’ve witnessed. I suspect, however, that the narratives for 2021 will include two additional themes that are just starting to boil to the surface.
- Inflation! Always with the exclamation point. While I don’t believe, putting my economics hat on, that 2021 will somehow start a new 1970s, there’s absolutely no question that the political narrative is going to shift back to one of deficit hand-wringing, and inevitably we will see money flow into TIPS strategies and commodities, as investors try and position themselves for inflation-to-come.
- Infrastructure! While still not on the front-burner, infrastructure spending is one of the few “big G” spending initiatives that could generate bipartisan support, and surprisingly few ETFs are positioned for this coming theme. This will inevitably change, and we’ll see fund launches, flows and headlines soon enough.
Advice for the World Weary
As you read your prediction stories and year-end wrap ups, I’d encourage you to remember that there’s nothing magical about calendar dates (other than derivative expirations). We’re not actually ending or beginning anything. We’re always “now,” and every investor’s time horizon is always “then.” If we have one lesson from March and April of 2020 it’s that investors who stuck to their long term plans did, in general, much better than those who panicked and traded in and around the chaos. Smart investors in 2020 did what smart investors in 2021 will do:
- Know what you own.
- Know why you own it.
- Practice good investment hygiene (that is, manage costs, manage taxes, always use limit orders).
Dave’s Best of 2020
Without further ado, and without picking “winners,” here are my “bests” of the year, both ridiculous and sublime:
Best ETF Launches
- It’s hard not to root for long time industry colleagues who break out from the big leagues to put on their own show in the barn. Such was the launch Simplify ETFs and their convexity products, particularly SPYC.
- Nontransparent/Semi-transparent/ANTs — whatever you call them, it was gratifying to watch T.Rowe Price, American Century, Fidelity and others wade into the ETF industry with traditional active management launches. They’re all “best” because the story is what we’re not talking about — the structure. Most of the clever non-transparent structural approaches are now in the market, they all seem to work, and nobody seems to care much. That’s a good thing. May the best products win.
- BETZ, WFH, VIRS, SPAK, Etc. You can be skeptical about any individual thematic approach, but as a whole, dozens of new funds were launched this year that tried and/or succeeded in catching the upward leg of the decidedly K-shaped recovery. Not every product was right for every investor, obviously, but the ETF industry gave investors real zeitgeist alternatives to either buying the whole market or day-trading Tesla and Bitcoin, and for that, I salute them.
- QQQJ/QQQM These two “Qs” variants from Invesco are classic head-slapping products that seem so obvious — even late — in retrospect. With “J” grabbing the next-100 stocks underneath the NASDAQ 100, and “M” just giving investors the bellwether innovator-heavy index on the cheap-and-skinny, it’s nice to see strong, continuous improvement from the old guard firms like Invesco.
Still here? OK then …
Best Albums On Repeat: Fiona Apple, Waxahatchee, Taylor Swift, Run the Jewels, The Strokes, Phoebe Bridgers, Beabadoobee, Fontaines DC, Dehd,
Best Video-Based Content I Actually Watched: Mandalorian, Borat Subsequent Moviefilm, The Good Place, The Queen’s Gambit, Ozark, Every F1 Race, Ted Lasso, Raised by Wolves, Picard, Tales from the Loop, Discovery, The Boys, Masterclass
Best Games I Actually Played: Hades, Kentucky Route Zero, MSFS, Star Wars Squadrons, Cyberpunk 2077, Pandemic: Season 0, Path of Exile, Roll20 D&D
Books: I read almost nothing new in 2020, as my nightstand and kindle were deeply backlogged. I can’t recommend Allie Brosh’s “Solutions and Other Problems” or Bill Bryson’s “The Body” strongly enough though.
Have a great New Years Eve everyone. Stay safe.
Dave Nadig is the CIO and Director of Research at ETF Trends and ETF Database. You can find him on twitter @DaveNadig.
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