This year has been a crazy one for investors seeking the best ETFs to buy.
First, the novel coronavirus took a heavy toll on countless stocks. Then we saw a nice recovery in the companies that stood to benefit most from changes in the “new normal.” Meanwhile, industries like air travel and entertainment experienced (and continue to experience) great pain. All of this managed to throw countless exchange-traded funds into limbo, as their general design to hold numerous stocks centralized around a specific theme made some of them particularly vulnerable.
But the madness didn’t stop there.
More recently, tech stocks took a beating shortly before the first debate leading into the Presidential election. Then President Donald Trump tested positive for Covid-19.
Now, with the election quickly approaching, we’re still trapped in a period of uncertainty. Will Biden win? Or will Trump stay in charge? Either victory could boost some stocks and ETFs, and tank others. Oh, and don’t forget, an asteroid might hit Earth before we even get to that Nov. 3 election date.
While that last bit is somewhat of a joke, it reflects the overall essence of 2020 quite nicely. Just when you expect that things couldn’t get any more crazy this year, they seemingly always do.
But, thankfully, InvestorPlace.com’s best ETFs for 2020 contest has plenty of winners that should hold strong no matter what happens. It also has a few losers too.
With all of that said, let’s take a look at how each of these funds has performed (in ascending order from best to worst) through the end of September:
- Renaissance IPO ETF (NYSEARCA:IPO)
- Global X Cloud Computing ETF (NASDAQ:CLOU)
- SPDR FactSet Innovative Technology ETF (NYSEARCA:XITK)
- Invesco QQQ Trust (NASDAQ:QQQ)
- The Communication Services SPDR ETF (NYSEARCA:XLC)
- AdvisorShares Vice ETF (NASDAQ:ACT)
- iShares Russell 2000 Growth ETF (NYSEARCA:IWO)
- Consumer Staples Select Sector Fund (NYSEARCA:XLP)
- The ETFMG Alternative Harvest ETF (NYSEARCA:MJ)
- U.S. Global Jets ETF (NYSEARCA:JETS)
There’s not much time left in the year, but a few of these ETFs still might manage to run higher.
Best ETFs for 2020: Renaissance IPO ETF (IPO)
Investor: Tom Taulli
Expense Ratio: 0.6%, or $60 annually per $10,000 invested
Performance Through Q3: 58%
In the end, there can be only one winner of the best ETFs contest. It looks like Tom Taulli’s pick, the IPO ETF, will be the one.
While that might sound like a dramatic reference to the cult-classic film Highlander (“there can be only one!”), it seems fairly accurate. Its current performance (78% year to date) is already significantly greater than the 58% YTD figure recorded at the end of September. At its current level, it has performed nearly 20% greater than CLOU, the No. 2 ETF in the contest.
As impressive as that may be, and with its victory seemingly secure, does it have any more room to run?
The coronavirus helped power IPO at the start of the year as social distancing initiatives led to the breakout success of Zoom Communications (NASDAQ:ZM), one of its top holdings. But with clearer expectations developing for the “new normal” ahead, are continued gains guaranteed?
Taulli thinks IPO has what it takes to continue its placement among the best ETFs in the years ahead. While he acknowledges that the IPO market is getting a bit “frothy,” he thinks the trend will continue for some time. According to Taulli, the ETF is a strong way to play the current popularity of IPOs: “when it comes to investing in IPOs, it’s a good idea to have diversification — this is what the IPO fund provides.”
Global X Cloud Computing ETF (CLOU)
Investor: Dana Blankenhorn
Expense Ratio: 0.68%
Performance Through Q3: 47%
The overall success of cloud stocks (what the CLOU ETF specializes in) this year is undeniable. Again, the pandemic amplified much of that success, but cloud computing is a future-looking theme that was bound for significant relevance and gains without the virus catalyst factored in.
But even the titans must fall from time-to-time. According to Dana Blankenhorn, while the CLOU ETF has been a winner this year, its performance more recently has been ugly. Even so, the ETF is in the No. 2 spot of the contest, and there’s plenty of reason to think it will endure in the months and years ahead:
The companies in CLOU, and those that might be added, are in good position to build the Machine Internet. Anything whose condition can be sensed, calculated, and adjusted will become a networked computer over the next decade. More internet demand will come from machines than from people using them.
That’s as good of a long-term catalyst as any. Just don’t expect CLOU to edge out IPO as the winner for best ETFs. But in the big picture, as a longer-term investment, Blankenhorn remains positive on the ETF’s outlook.
SPDR FactSet Innovative Technology ETF (XITK)
Investor: Bret Kenwell
Expense Ratio: 0.45%
Performance Through Q3: 43%
As its namesake suggests, the XITK ETF focuses on companies involved in innovative technologies. And, as you’re likely realizing by now, the new virus has helped propel many innovative companies since their technologies were adopted much more quickly than expected.
Its holdings include the aforementioned Zoom Communications and other “coronavirus stocks” like Shopify (NYSE:SHOP) and DocuSign (NASDAQ:DOCU). Although the virus boost will fade in time, most of its holdings should retain their relevance in the years ahead. This is largely what makes Bret Kenwell think that it will remain one of the best ETFs heading into the new normal. He also notes the fund’s diversity as a positive aspect that sets it apart from other growth-based ETFs:
Diversification can be a negative in some cases. In the case of the XITK ETF though, it helps remove any single-stock risk. That’s a benefit in my mind. That’s because growth stocks are likely to rally or fall together, but any one stock could really ruin the fund’s performance if it had too large of a weighting.
According to Kenwell, if growth stocks continue to rise, then the XITK ETF will also run higher. If he’s right, this might be the dark horse of the race. Watch out, IPO!
Invesco QQQ Trust (QQQ)
Investor: Readers’ Choice
Expense Ratio: 0.2%
Performance Through Q3: 27%
Our reader’s choice for the contest, QQQ, is always a solid bet. In fact, it won the best ETFs contest in a prior year. It continues to demonstrate its viability as an investment, currently ranked No. 4 in the contest.
Part of what makes it attractive is that its holdings include the 100 largest non-financial companies on the Nasdaq. While it’s not explicitly a tech stock ETF, it holds behemoths like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) as a part of its top holdings.
Usually this is a great thing — and for much of the pandemic it has been a winner. But, more recently, tech stocks took a dive and QQQ has started to stutter. I wouldn’t expect QQQ to surpass the likes of IPO, CLOU or the XITK ETF this year, but that doesn’t mean it’s still not one of the best ETFs out there today.
If you have a positive outlook on the world of tech and an economic recovery in general, then there’s no reason to lose faith despite the recent dip.
The Communication Services ETF (XLC)
Investor: Todd Shriber
Expense Ratio: 0.13%
Performance Through Q3: 10%
A winning theme this year (as with most years in recent times) has been tech. But many of the companies in the newly formed Communication Services sector are also intertwined with these tech-based themes. As such, Todd Shriber’s pick, XLC, has managed to chart a 10% rise this year. That success comes despite all the challenges induced by the pandemic.
The gains for XLC might not be as monstrous as the top three picks in the contest, but there’s still immense promise for its holdings in the years ahead. Holdings like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) aren’t going to disappear anytime soon. And video game plays Electronic Arts (NASDAQ:EA) and Activision-Blizzard (NASDAQ:ATVI) have only gotten better as more people cling to video games for entertainment rather than bars and in-person socialization.
Shriber thinks the holiday season could bolster its videogame holdings and companies like Facebook and Alphabet will overcome political challenges, all of which could help it climb a little higher by the end of 2020.
AdvisorShares Vice ETF (ACT)
Investor: InvestorPlace Staff
Expense Ratio: 0.99%
Performance Through Q3: 4%
The InvestorPlace Staff never assumed that the ACT ETF would win the contest, but they did see reason for optimism beyond a victory.
As one of the few ETFs that focus on sin stocks, ACT holds marijuana, booze and tobacco companies. While tobacco and marijuana stocks haven’t been hot players this year, some booze stocks have managed to climb higher. In particular, Boston Beer (NYSE:SAM) has marked impressive gains this year on the popularity of its new seltzer booze brand “Truly Hard Seltzer.” This has helped keep ACT afloat while much of its marijuana holdings continue to suffer.
ACT won’t win this year’s contest. But the success of booze amid the coronavirus pandemic and the outcome of the election might ultimately power it a little higher this year and further in the future. It’s certainly worth keeping an eye on if you’re interested in sin stocks.
iShares Russell 2000 Growth ETF (IWO)
Investor: Ian Bezek
Expense Ratio: 0.24%
Performance Through Q3: 2%
Although Ian Bezek’s pick for this year’s best ETFs contest had a rough start in 2020, he still has faith in its comeback. Citing what he calls the “small-cap advantage,” Bezek argues that small-cap stocks generally out-perform large-cap stocks, and while the fund’s smaller holdings have suffered, when the economy recovers, they will soar again.
As Bezek notes, just looking at its YTD performance alone is a little deceiving. Given the selloff in March, the ETF has already climbed more than 70% higher back from its lows. And he thinks that once economic conditions start to normalize, we might expect IWO to rise even higher.
It’s all a matter of perspective:
In owning the IWO ETF, you get exposure to some of the most innovative companies in the country. And at only 5% more expensive than last year, IWO is still a reasonably priced way to get that exposure. It certainly beats chasing many of the software or e-commerce stocks that have already doubled or tripled this year.
If you think that argument by Bezek holds muster, then you might consider IWO a great play from a longer-term view.
Consumer Staples Select Sector Fund (XLP)
Investor: Kent Thune
Expense Ratio: 0.13%
Performance Through Q3: 2%
Playing it safe usually isn’t very exciting, but sometimes it can also prove beneficial in an economic downturn.
As mentioned earlier, 2020 has been a crazy year so far. And the upcoming U.S. presidential election aims to make it even crazier. That’s part of the appeal of a fund like XLP — it offers stability.
After all, even in desperate times, consumers will always purchase “essential” items. That has always been the appeal to consumer staples stocks, the investment theme XLP focuses on. And it’s largely why Thune picked it for the contest.
But, while Thune thinks it’s still a wise choice, he also points out another lesson he’s learned in the process. Old investment theses don’t necessarily apply to the new normal. Instead, he sees “tech as the new defensive play:”
While it may be foolish to say those four most dangerous words, ‘this time it’s different,’ it’s also foolish to assume that the same defensive strategies will work ad infinitum … 2020 was certainly not a normal year, but it does provide a glimpse into what the future holds for capital markets. And investors are wise to take note.
In summary, the head honchos in tech also demonstrate significant resilience. Maybe it’s time to stop looking at XLP as the only go-to defensive ETF on the market?
The ETFMG Alternative Harvest ETF (MJ)
Investor: Tim Biggam
Expense Ratio: 0.75%
Performance Through Q3: -43%
As seen with the ACT ETF earlier, this hasn’t been a strong year for marijuana stocks. But while ACT managed to stay in the green this year, bolstered by its holdings in the booze industry, the MJ ETF ended up tanking.
Given that it’s only focused on cannabis-based stocks, this should be no surprise. According to Biggam, the market for CBD and other products is oversaturated and investors lost faith in some of the hype machines that stormed higher in 2019. But as glum as that may be, he also thinks this is a great opportunity.
Biggam sees the MJ ETF making a comeback towards the end of this year and into 2021. He thinks the release of new cannabis-based beverages and further developments in legalization efforts in the U.S. will prove strong catalysts moving forward. As such, he sees now as a good opportunity to get into MJ as a fund with a high-dividend yield at a cheap price.
U.S. Global Jets ETF (JETS)
Investor: Vince Martin
Expense Ratio: 0.6%
Performance Through Q3: -45%
Out of all the picks in this contest, JETS has consistently performed the worst. As a fund with holdings based solely in the airline industry, it has done about as well as you might expect during a global pandemic. But according to Vince Martin — the one who picked it — the impact of the pandemic managed to highlight some of the other issues influencing the industry.
Martin says while it’s tempting to hop on JETS now and hope for a recovery in the long term, there’s reason this investment thesis falls apart: “In practice … cyclical stocks usually aren’t cheap enough at the top. With economic damage from the pandemic likely to linger, it’s going to take years simply for investors to get comfortable with the macroeconomic risk in the sector.”
When you combine this reality with the fact that the industry was poorly prepared for a potential threat that it had already anticipated (a pandemic), it’s clear why Martin is less optimistic about JETS as a comeback ETF for 2021. Only time will tell if the industry can regain its former strength. But for now, Martin suggests waiting on the sidelines.
On the date of publication, Robert Waldo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Robert Waldo has been a web editor for InvestorPlace.com since 2016.