Five ETFs to deliver stellar returns in 2021

Is the rotation into cyclical stocks set to continue this year?

Tom Eckett

a road leading to a city

Markets were sent on a wild ride in 2020 as COVID-19 wreaked havoc across global economies, however, the news of a successful vaccine and Joe Biden’s victory in the US election provided some much-needed calm towards the end of the year.

While tech stocks in the US were the key return drivers for the majority of the year, Pfizer’s positive vaccine news caused a rebound in pro-cyclical stocks last November with value outperforming growth by its widest margin since the Global Financial Crisis (GFC).

Furthermore, it is unlikely developed market central banks will be hiking rates anytime soon with coronavirus remaining a major risk and inflation struggling to threaten on the upside.

This means 2021 could be the year of global economic recovery and the perfect backdrop for risk-on assets.

As we enter the new year, ETF Stream has selected five ETFs for investors to consider in their portfolios.

1. UBS ETF MSCI United Kingdom UCITS ETF (UC64)

Starting off the list is the $2.2bn UBS ETF MSCI United Kingdom UCITS ETF (UC64) which currently offers exposure to 88 UK large and mid-cap companies.

UK equities had a torrid 2020 with the FTSE 100 suffering its worst year since the GFC in 2008 falling 14.3% as businesses were impacted by the uncertainty of the ongoing negotiations combined with the coronavirus pandemic.

However, with the vaccine being rolled out across the country and UK Prime Minister Boris Johnson securing a trade deal with the European Union on 24 December, the outlook has become more positive.

Owning both the large and mid-cap segments of the UK market will enable investors to capture the full rebound instead of solely owning the FTSE 100 where approximately 70% of its constituents’ earnings are derived from overseas.

2. iShares Edge MSCI World Value Factor UCITS ETF (IWVL)

Continuing with the cyclical rebound theme, the $3.4bn iShares Edge MSCI World Value Factor UCITS (IWVL) tracks the MSCI World Enhanced Value index which currently includes 400 stocks.

The value factor has come back to life in recent months following a decade in the wilderness. Highlighting this, IWVL has returned 19.6% over the past three months, as at 8 January, versus 14.2% for the iShares MSCI World UCITS ETF (IDWR).

Many economists are positive about the performance of cyclical value stocks following the vaccine news as lockdowns begin to ease and the economy starts recovering.

One point to note is, like other value ETFs, IWVL only has a 2.8% weighting to energy despite the sector being pro-cyclical so this exposure will have to be found elsewhere.

3. iShares J.P. Morgan $ EM Bond UCITS ETF (SEMB)

With the US dollar expected to weaken over the next year and developed market government bonds negative yielding, one ETF that looks set to do well is the $11.7bn iShares J.P. Morgan $ EM Bond UCITS ETF (SEMB).

Biden’s pledge to add to the $900bn coronavirus stimulus package is likely to pass through Congress following Democratic-candidate Raphael Warnock’s victory in Georgia adding more pressure to the already weak US dollar.

Furthermore, SEMB has big weightings to Russia and Brazil which should outperform against a backdrop of rising commodity prices following a tough year for both countries.

4. L&G Clean Water UCITS ETF (GLUG)

Thematic ETFs shot the lights out in 2020 with a number of strategies such as clean energy and cloud computing delivering the strongest performance across all European-listed ETFs.

The $38m L&G Clean Water UCITS ETF (GLUG), which launched in July 2019, is one such thematic ETF. The United Nations has warned water shortages are now impacting more than 3 billion people around the world amid rising demand and poor water management.

Offering exposure to 66 companies involved in the world’s management of water including those engaged in water production and processing, GLUG looks well set to deliver big returns over the next five years.

5. Invesco EQQQ Nasdaq 100 UCITS ETF (EQQQ)

It is tough to ignore the digital revolution since companies such as the FAAMGs have an impact on almost everything we do.

The $5.4bn Invesco EQQQ Nasdaq 100 UCITS ETF (EQQQ) tracks the Nasdaq 100 which offers ETF investors the purest way to gain exposure to the tech giants.

With its top 10 holdings including Apple, Microsoft, Tesla, Facebook and Google, EQQQ delivered stellar performance over the past year returning 46.3%, as at 8 January.

Investors will certainly be wanting some exposure to EQQQ this year with these companies showing no signs slowing down anytime soon.

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