Despite the economic crisis, 2020 turned out to be a good year for the stock market, with the total market cap of stocks in the U.S. rising approximately 22% according to GuruFocus data. However, this uptrend didn't occur across the board – some areas of the market, especially mega-caps, tech stocks and "pandemic stocks," were responsible for a far more significant portion of the gains.
Taking a closer look at how stocks in major indexes such as the S&P 500 is one way to evaluate which areas of the market outperformed over the past year. Another thing to observe is how exchange-traded funds, or ETFs, have performed compared to the index averages.
ETFs are a good way for investors to add diversity to their portfolios by investing in a variety of stocks through one investment vehicle. While it is still helpful to research the top holdings of an ETF when doing your due diligence, they primarily serve as more of a macro-based allocation, with the expectation that the sector or market in which the ETF's holdings are concentrated will flourish in the coming years.
With this in mind, we will look at three ETFs that showed stellar performances in 2020 and seem set to continue their upward paths in the long term due to favorable market outlooks.
ETFMG Prime Cyber Security ETF
ETFMG Prime Cyber Security ETF (HACK, Financial) aims to track the performance of the Prime Cyber Defense Index, which invests at least 80% of its total assets in companies worldwide that either provide cybersecurity applications or services or produce hardware or software for cybersecurity activities.
The ETF gained 41% in 2020 to end the year at $57.56. As of Jan. 7, the ETF traded around $57.92 for a price-earnings ratio of 28.94.
With the global macro trend of digitalization, the shift to the cloud, the growing utilization of artificial intelligence and more, the world is becoming increasingly dependent on the cyber world for a wide variety of applications.
This also means that cybersecurity is becoming more and more crucial to businesses. Those that are unable to protect their cyber assets from attackers stand not only to lose those assets, but also to have hackers take advantage of them.
Cybersecurity is a relatively young industry, having grown to approximately 35 times the size it was 13 years ago. According to cybersecurity spending reports and projections from Statista, spending is on track to come in around $124 billion for full-year 2020. In the coming years, the cybersecurity industry can be expected to grow alongside the increasing use of technology.
Global X MSCI China Consumer Discretionary ETF
The Global X MSCI China Consumer Discretionary ETF (CHIQ, Financial) tracks the Solactive China Consumer Index, which reflects the performance of China's consumer discretionary sector via companies that are either domiciled in China or have their main business operations in China.
The ETF gained 92% over the course of 2020 to end the year at $35.58. As of Jan. 7, the ETF traded around $36.42 for a price-earnings ratio of 32.04.
Consumer discretionary refers to goods and services that are not essential, but which consumers find highly desirable if they have the extra income to spend on them. This includes things like entertainment, technology, leisure, high-end apparel, travel and online retail.
As the world's second-largest economy with the highest number of billionaires, China may not seem at first glance to be a developing economy, but the metrics are skewed due to its population of over 1.42 billion. It can still technically be classified as a developing country in terms of gross national income per capita. The World Bank sets the threshold GNI per capita for a developed country at $12,055, and China's GNI per capita was $10,410 in 2019, representing an 8.21% increase from 2018.
This means that the consumer discretionary sector is an especially attractive growth, since it is soon to transition from a developing economy to a developed one, where the majority of the population will see a significant increase in their disposable income in the coming years.
IShares S&P Global Clean Energy Index Fund
The iShares S&P Global Clean Energy Index Fund (ICLN, Financial) tracks the performance of approximately 28 clean energy companies such as solar stocks and independent clean energy utilities, at least 90% of which are components of the S&P Global Clean Energy Index.
In 2020, the ETF gained 140% to end the year at $28.24. As of Jan. 7, the ETF traded around $33.41 for a price-earnings ratio of 34.36.
After solar and renewable utility stocks struggled in recent years, there was undeniably a fair amount of fear that they would fold under the pressure of a weakened economy during the Covid-19 crisis. The overproduction of oil that has been plaguing the fossil fuel industry has also driven down the cost of petroleum products.
However, since outdoor work was deemed relatively safe from the spread of the pandemic, most clean energy infrastructure projects went forward as planned. As a result, many clean energy stocks have exploded off the charts in 2020, providing some of the best returns in the stock market.
Unlike the already-saturated market for fossil fuels, the clean energy market supply is nowhere near reaching demand levels, providing a long runway for growth. According to a study from the Center for Climate and Energy Solutions, renewable energy is the fastest-growing energy sector in the U.S., gaining 100% between 2000 and 2018. Worldwide, renewables are expected to grow in the coming years while the oil and gas industry growth begins to stagnate.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
Read more here:
- The Hottest IPOs of 2020
- Hennessy Japan Small Cap Fund Buys 5 Stocks in 4th Quarter
- 3 Stocks That Outperformed the S&P 500 in 2020
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