The continuation of the trade war between China and the United States, as well as concerns of a yield curve inversion, all led to a dramatic conclusion to 2018 and a questionable start to 2019. As such, many stocks and exchange-traded funds began the year in the red. But despite this rough start, the “doomsome” outlook dissipated and the S&P 500 ultimately gained another 30% on the year.
Throughout the year, several InvestorPlace.com writers chose what they thought might be the best ETFs for 2019. And while some of these ETFs ended up being duds (several picks were affected by the trade war), the top 5 picks all gained more than 25% year to date.
But all of the ETFs for 2020 are different from last year’s picks. And the arguments behind some are perhaps far more daring than before. With trade war tensions easing, marijuana stocks losing strength and general market optimism rising, what should we expect in 2020? And might the 2020 election throw a huge wrench into things?
Regardless of what happens, each fund in the best ETFs contest this year reflects the core reason why someone might choose an ETF over a single stock investment. Specifically, each fund focuses on a centralized theme that enables access to numerous companies related to that core concept.
If you’re a big believer in the future of a big idea, potential catalyst or think you know where the market will go — good or bad — then owning shares of multiple companies related to that market thesis through an ETF can be highly profitable.
The best ETFs contest will start with the closing prices of each fund on Dec. 31, 2019, and assess their performance for the year from that day forward. Throughout the year, we will provide quarterly updates on the performance of each fund, until a winner is crowned at the end of 2020. Note that dividends will not be factored into the performance assessment for each ETF.
With out further ado, in alphabetical order by ticker, InvestorPlace.com’s best ETFs for 2020 are:
Best ETFs for 2020: AdvisorShares Vice ETF (ACT)
Investor: InvestorPlace Staff
Expense Ratio: 0.99%, or $99 annually per $10,000 invested
First on this list of best ETFs for 2020 is the InvestorPlace staff pick — AdvisorShares Vice ETF (NASDAQ:ACT). The investment thesis behind this one is simple: a heavy emphasis on vice stocks that revolve around cannabis, tobacco and alcohol. Part of ACT’s appeal is that it isn’t a direct play on marijuana, but many of its overall alcohol and tobacco holdings still have exposure to the catalysts within this space.
In fact, “[i]ts emphasis on “recession-resistant” areas makes it particularly promising for those who might be concerned that we’re headed for more dreary times. But it doesn’t need a recession to be successful, as the vices it promotes will always be appealing.”
While marijuana stocks took a dive this year, it’s possible that there’s room for some stability in the space as expectations gain a heavy dose of reality. Regardless of whether ACT comes out on top at the end of the year, it should prove to be a very interesting play that reflects the greater mindset of investors’ faith in marijuana and other substance-based vices.
Global X Cloud Computing ETF (CLOU)
Investor: Dana Blankenhorn
Expense Ratio: 0.68%
Blankenhorn has gone all-in with his pick of the Global X Cloud Computing ETF (NASDAQ:CLOU). Given his extensive focus on cloud stocks over the years, it should be no surprise that he has strong faith in what lies ahead for many of these companies.
“Despite having been around for over a decade, most companies have only completed roughly 20% of their transitions to the cloud. The cloud is a long-term trend. It might be more precise to call cloud the long-term trend,” Blankenhorn writes.
Clearly, Blankenhorn thinks we’ve only scratched the surface of gains within the cloud space. And CLOU also has a bit more diversification than its namesake might suggest, given that its holdings aren’t just restricted to the companies that create cloud platforms, but also companies that produce hardware and create the infrastructure that help enable it to function.
Still, he acknowledges that there are some risks involved with CLOU. Some of its holdings are less appealing than others, and Blankenhorn points out that “[i]f the economy turns sour, I could be out of the money on CLOU.” Yet, he still retains confidence in the fund’s endurance regardless of the risks, as “history says technology stocks are the first group to come back after a downturn.”
Renaissance IPO ETF (IPO)
Investor: Tom Taulli
Expense Ratio: 0.6%
Initial public offering expert Tom Taulli has chosen — surprise! — an IPO-based fund to win the ETF contest in 2020. Specifically, Taulli picked the Renaissance IPO ETF (NYSEARCA:IPO).
Taulli’s excitement over the IPO ETF’s chances in 2020 is largely based in the fact that IPOs are “where you can find the next big idea.” And big ideas can lead to massive gains in the long run. But with great potential rewards come great potential risks. This is why he thinks an ETF like IPO is ideal for those interested in taking advantage of new companies: “it is important to diversify across various IPO investments.”
While the IPO fund still has plenty of risk (and some choppy performance throughout its lifespan), the fact that its thesis isn’t based solely on the success of one particular company gives it more room for long-term strength.
iShares Russell 2000 Growth ETF (IWO)
Investor: Ian Bezek
Expense Ratio: 0.24%
InvestorPlace.com writer Ian Bezek chose the iShares Russell 2000 Growth ETF (NYSEARCA:IWO) to win in 2020. His belief in IWO’s success is largely based on the idea that investor sentiment will continue to be positive as we head into the new year, and the best investments to take advantage of such growth are small-cap stocks, not the large-cap names that everyone is familiar with.
In Bezek’s own words:
“With the Fed now cutting rates again, conditions are in place for a rise in earnings growth next year. The economy remains robust. Just look at consumer confidence or unemployment. Any sign of a trade deal, and things should surge. Don’t forget that there’s an election in November, and the incumbent has every incentive to try to juice the economy and stock market ahead of the vote.”
Assuming Bezek’s optimism for massive growth in 2020 pans out, the IWO ETF clearly stands to make impressive gains.
U.S. Global Jets ETF (JETS)
Investor: Vince Martin
Expense Ratio: 0.6%
Although the year is not yet finished, it looks like Vince Martin’s pick for 2019’s ETF contest — iShares U.S. Home Construction ETF (BATS:ITB) — will come out on top (it’s currently up more than 50% for the year, while its nearest rival is up 35%). But Martin is shifting gears for 2020 with his selection of the U.S. Global Jets ETF (NYSEARCA:JETS).
This is a broad bet on the rejuvenation of airline stocks in the new year. Martin breaks down his primary thesis behind the JETS ETF in the following manner:
“The U.S. economy remains strong, which usually benefits airlines and airline stocks. Worldwide demand for air travel continues to rise. Fuel costs are moderate. The long and destructive history of price wars within the industry appears to have ended.”
While these are certainly heavy indicators of strength, the JETS ETF — and airline stocks in general — have lagged. But Martin thinks “that will change … [i]f the economy continues to grow, airline earnings will do the same, and at some point investor confidence toward the group should pick up.”
Still, he acknowledges that there are some risks involved, particularly if competition between airliners increases dramatically and economies outside of the U.S. continue to struggle.
Time will tell if Martin becomes a two-time champion of the best ETFs contest. If his faith in the airline industry comes true, then he has a strong shot of retaining the title.
The ETFMG Alternative Harvest ETF (MJ)
Investor: Tim Biggam
Expense Ratio: 0.75%
This next pick, The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), from Tim Biggam is particularly risky.
As mentioned earlier, cannabis stocks had a rough ride in 2019, and the MJ ETF is a fund that focuses solely on that space. As such, it will rise and fall with the successes and failures of companies within that space. But while enthusiasm toward marijuana stocks has diminished, that leads to a promising opportunity in MJ.
As Biggam points out:
“2020 will be the year of the contrarian. The out of favor, Dogs of the Dow type methodology will likely generate the most alpha as we enter the next decade. The sector that best embodies this philosophy is cannabis.
He expands upon his bullishness toward the cannabis space explaining that its growth prospects are still incredibly strong despite investors’ concerns this year: “The cannabis market is expected to grow at an annual rate of 30% over the next four years. Projections are for about $40 billion in sales in 2023 from the current sales of roughly $10 billion.”
If you buy into the idea that now — when marijuana stocks are down — is the perfect time to hop on the hype train, then the MJ ETF might prove to be the perfect choice. And despite whatever happens in 2020, it should prove to be successful in the long run as the potential behind cannabis-related healthcare solutions and greater legalization of recreational use within the U.S. are fully realized.
Invesco QQQ Trust (QQQ)
Investor: Readers’ Choice
Expense Ratio: 0.2%
Although it might not be the sexiest or most interesting fund on the list, our readers have chosen a proven winner with their pick of the Invesco QQQ Trust (NASDAQ:QQQ). (Note: The QQQ ETF won InvestorPlace.com’s best ETFs contest in 2018.)
The probable thinking behind this choice is based on two factors:
- The broader market optimism in 2019 should continue into 2020, and
- QQQ’s holdings — big name companies at the head of the hottest tech innovations — stand to rise higher as a result.
Assuming the strength behind this idea holds true, QQQ will be one of the best ETFs to buy for 2020.
Our readers’ “optimism is well-justified given that … [QQQ’s holdings] are packed full of potential catalysts. Their innovations — both current and future — will help shape our world in the years ahead. Many of its holdings are a part of the movement toward the ‘Internet of Things,’ autonomous vehicles, 5G, artificial intelligence and high-tech innovations in healthcare.”
While QQQ might not be backed by an exciting new investment idea, it’s certainly an idea that has been proven to work over the years.
SPDR FactSet Innovative Technology ETF (XITK)
Investor: Bret Kenwell
Expense Ratio: 0.45%
Bret Kenwell’s pick for the best ETFs contest — the SPDR FactSet Innovative Technology ETF (NYSEARCA:XITK) — is in the same vein as the QQQ, but its emphasis is far more narrow and the fund’s design is far more complex.
The narrower focus of XITK is that it tracks companies based on their technological innovations, not their inclusion on the Nasdaq Composite. That means you get exposure to hot tech disruptors like Roku (NASDAQ:ROKU) and Shopify (NYSE:SHOP).
The fund’s complexity, as described by Kenwell, is that “its top 10 holdings only account for 19.1% of the portfolio.” He expands upon this point further, stating that “[g]enerally that figure is much higher for industry- and sector-specific ETFs … Outperformance by one or two names won’t get the job done in this case. On the flip side, one or two names are unlikely to be the demise of the ETF, should the overall group do well.”
Only time will tell whether this added layer of complexity proves to be beneficial. But regardless, the promise behind XITK’s concept is undeniable. Investors will always be drawn to companies that are leading innovations in areas that will influence the lives of most people on this planet.
The Communication Services ETF (XLC)
Investor: Todd Shriber
Expense Ratio: 0.13%
ETF expert Todd Shriber’s pick for the best ETFs contest is based in the newest S&P 500 sector — communications services. As such, the Communication Services Select Sector SPDR’s (NYSEARCA:XLC) primary holdings include crowd favorites like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
As Shriber points out, these holdings alone “combine for over 43% of XLC’s roster.” At first glance, that massive allocation to two companies might be daunting, but the benefit becomes clearer when you look at things a bit closer.
According Shriber, “for capital-starved investors who can’t afford to build adequate stakes in those internet giants, XLC is a fund that makes a lot of sense. More importantly, XLC’s proxy-like status on Alphabet and Facebook is important because those companies control almost 60% of the global internet advertising market, a segment that prints cash at a rapid pace.”
But his case for XLC isn’t just based on the strength of these two companies alone. Shriber points out other heavyweight companies like Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA) and catalysts like cloud gaming and 5G as reasons for his interest in the fund.
If XLC’s holdings can take advantage of these catalysts and continue their general upward trajectory, then the fund should be a strong contender for the best ETF in 2020.
Consumer Staples Select Sector Fund (XLP)
Investor: Kent Thune
Expense Ratio: 0.13%
The final fund on this list is Kent Thune’s pick — the Consumer Staples Select Sector Fund (NYSEARCA:XLP).
Like some of the other ETFs above, the investment thesis behind XLP is simple: “think about how to invest in a moderately healthy economy that is beginning to show signs of weakness but no strong signal of recession. In this environment, investors are wise to focus on dividend-paying stocks.”
XLP’s emphasis on consumer staples — companies with products that people will purchase in good times or bad — is prefect for navigating that challenge. Although we’re not yet in panic mode, Thune asserts that a safer approach to next year could prove to be the best decision, as there are several big “signs of a late-phase environment or slowing economy.”
The XLP ETF’s more reserved nature means it might not be the winner of the contest next year, but it might prove to be the most wise choice out of the bunch if the economy does eventually sour as Thune believes it will.
Robert Waldo is a web editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.