Editor’s note: This article was updated on March 12, 2021, to correct Grow Generation’s ticker.
If you’re considering investing in some of the hottest exchange-traded funds (ETFs) to buy in 2021, it makes sense to first come up with a definition of what makes an ETF hot.
Is it strictly performance? Is it net fund flows? Or is there some other quality you look for when considering a popular ETF?
There’s no question ARK Invest Chief Executive Officer Cathie Wood’s five actively-managed ETFs have been covered widely by the business media. Rightly so. The portfolio manager’s focus on innovation and disruption in a period of chaos resulting from the novel coronavirus has made her funds very attractive to investors looking for growth.
But that’s a double-edged sword.
Wood’s flagship fund, the ARK Innovation ETF (NYSEARCA:ARKK), has gotten killed in 2021. Down almost 11% year-to-date, the $17.7-billion fund is losing ground this year as investors in many of its high-tech bets take profits, opting to dial back their risk profile.
However, despite the correction ARKK’s faced in 2021, it’s managed to continue to pull in more funds. On Feb. 26 and March 1 trading, it added $611 million to its asset base.
Long-term, I think she’ll be fine.
In the meantime, I’ve got to come up with a list of 10 hot ETFs that I believe can win in 2021 and beyond. They are:
- ETFMG Alternative Harvest ETF (NYSEARCA:MJ)
- Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK)
- Fidelity MSCI Energy Index ETF (NYSEARCA:FENY)
- AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS)
- VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO)
- The Emerging Markets Internet & E-Commerce ETF (NYSEARCA:EMQQ)
- Invesco Dynamic Leisure and Entertainment ETF (NYSEARCA:PEJ)
- iShares Micro-Cap ETF (NYSEARCA:IWC)
- Vanguard S&P Small-Cap 600 ETF (NYSEARCA:VIOO)
- SPDR S&P Regional Banking ETF (NYSEARCA:KRE)
To do that, I will restrict my screen to ETFs with at least $500 million in assets under management and are up at least 10% YTD or 25% over the past year.
10 of the Hottest ETFs So Far This Year: ETFMG Alternative Harvest ETF (MJ)
The largest of the cannabis ETFs, ETFMG Alternative Harvest, has total assets of $1.6 billion and a YTD total return of 48%.
A quick look at its top 10 holdings shows big performances have been delivered over the past 52 weeks, the best coming from hydroponics retailer GrowGeneration (NASDAQ:GRWG), which is up 116% over the past year.
Marijuana continues to be a hot story in 2021 as the new White House administration takes a more permissive view of recreational cannabis. Furthermore, cannabis companies are starting to deliver better earnings reports — pushing the individual stocks higher.
Amplify Transformational Data Sharing ETF (BLOK)
Unless you follow blockchain pretty closely, I doubt you’ll be very familiar with many of its top 10 holdings. The returns, however, have been outstanding over the past year. Voyager Digital (OTCMKTS:VYGVF), for example, is up 6,787% over the past 52-weeks. It operates a cryptocurrency brokerage.
As the ETF’s investment presentation states, the global blockchain market is expected to grow from $3 billion in 2020 to almost $40 billion by 2025 — a compound annual growth rate of 67.3%.
Thus, investors should expect above-average volatility from BLOK despite its diversification.
ETFs to Buy: Fidelity MSCI Energy Index ETF (FENY)
If you haven’t noticed, energy stocks are making a comeback in 2021. Fidelity’s ETF has $834.2 million in assets under management and is up 41.1% YTD.
A big reason for the ETF’s excellent performance is oil prices. As I write this, a barrel of West Texas Intermediate (WTI) crude is trading for more than $64, a level it hasn’t seen in over a year.
FENY tracked the performance of the MSCI USA IMI Energy Index. However, as of Dec. 1, 2020, it changed the benchmark to the MSCI USA IMI Energy 25/50 Index. As a result, no single holding can exceed a weighting of 25%, and all of the holdings with 5% weightings or more can’t exceed 50% of the fund’s total assets.
The change actually increased the index’s top 10 holdings to 72.2% of the portfolio’s overall assets compared to 70.2% under the previous benchmark. Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) account for 40% of the fund’s assets. The weightings drop considerably after that.
I’m not a big fan of energy stocks, but this ETF gives you exposure at a low fee of 0.08% annually.
AdvisorShares Pure US Cannabis ETF (MSOS)
The second-largest cannabis ETF with assets of $1 billion, MSOS has delivered 18% YTD returns so far in 2021. That might not be as high as MJ, but compared to the entire U.S. markets, it’s delivered super-sized returns for its shareholders.
Some investors prefer this ETF over MJ because it invests in U.S.-domiciled multi-state operators or MSO’s for short. It’s not cheap at 0.74% annually. That said, you’re paying more because it’s actively managed.
One of my favorite holdings in MSOS doesn’t even grow cannabis. Instead, it owns the real estate and buildings and leases them back to growers of medical-use marijuana.
The company reported fourth-quarter results in February that were through the roof with sales and adjusted funds from operations (AFFO) up 162% and 180%, respectively. IIPR has a 4.3% weighting in MSOS.
ETFs to Buy: VanEck Vectors Video Gaming and eSports ETF (ESPO)
Thematic investing continues to be a big deal and gaming leads the way. With reasonable fees of 0.55%, its 25 stocks are a who’s who of video game companies.
VanEck’s got four reasons to invest in video gaming and e-sports. From where I sit, the most important is that it’s transforming entertainment, sports and media.
“Esports reflect the convergence of entertainment, video gaming, sports, and media businesses. With an active, engaged and relatively young demographic, the stage is set for sustainable long-term growth,” ESPO’s website states.
If you don’t know someone who is a religious gamer, you don’t know enough people. The industry is booming and I don’t see things slowing for several years.
The Emerging Markets Internet & Ecommerce ETF (EMQQ)
If e-commerce wasn’t already a thorn in the side of bricks-and-mortar retail before the pandemic, it definitely is now. Regardless of when the pandemic is officially over, companies like Amazon (NASDAQ:AMZN) have grabbed the bull by the horn, and shareholders are loving the results.
The EMQQ tracks the performance of The Emerging Markets Internet & Ecommerce Index, a collection of companies generating a majority of their revenue from the internet and e-commerce and operating in emerging markets.
As a result, you won’t see names like Amazon on its holdings list. Instead, you’ve got Chinese, South African, and Latin American companies in the top 10. MercadoLibre’s (NASDAQ:MELI) one of my favorite Latin American companies. It has been since 2013. It continues to grow like weeds.
It’s not cheap at 0.86% annually, but it has delivered an annualized total return of 17.8% since inception. So the proof is definitely in the pudding, making this one of the top ETFs to buy.
ETFs to Buy: Invesco Dynamic Leisure and Entertainment ETF (PEJ)
One of the oldest ETFs on this list, PEJ, has been around since June 2005. The ETF is based on the Dynamic Leisure & Entertainment Intellidex Index. Using a combination of value and growth criteria, it invests in 30 U.S. leisure and entertainment companies.
The ETF has $1.6 billion in net assets. Rebalanced and reconstituted in February, May, August and November, the index invests in companies with market capitalizations from as low as $448 million to as high as $201 billion.
If you like an all-cap portfolio that’s not afraid to spread its investments amongst companies of all sizes, PEJ is for you. Its assets are divided almost equally between small-cap, mid-cap, and large-cap stocks.
iShares Micro-Cap ETF (IWC)
If ever there was a need for a diversified portfolio, micro caps would have to be it. IWC tracks the Russell Microcap Index’s performance, a collection of stocks with market caps ranging from $4 million to $4.6 billion.
Launched a couple of months after the PEJ in August 2005, it’s managed to gather $1.2 billion in total assets. Up 22.2% YTD and 68.4% over the past year, IWC has achieved an annualized total return of 8.3% since inception, about 60 basis points lower than PEJ.
The ETF’s second-largest holding with a weighting of 1.23%, is GameStop (NYSE:GME), the video game retailer that’s captivated investors’ interest small and large and from coast to coast. GME is one of 1,271 holdings held by the ETF.
So, if you want to bet on GameStop, IWC is a much safer way to do it.
ETFs to Buy: Vanguard S&P Small-Cap 600 ETF (VIOO)
Having just discussed a micro-cap, it’s only appropriate that we follow it up with a small-cap ETF. The Vanguard ETF has total assets of $1.5 billion. YTD, it’s up 18.9% and 53.9% over the past year.
My rationale for VIOO over VB was two-fold.
First, VIOO has far fewer stocks, with 603 compared to 1,426 for VB. As a result, VB’s top 10 holdings account for 4% of its portfolio compared to 7% for VIOO. Not surprisingly, VIOO’s number one holding is GameStop at 1.94%.
The second reason is that VIOO has an average market cap of $2.1 billion, almost one-third VB’s at $5.7 billion. VIOO’s a truer small-cap fund as a result.
A bonus: Since my 2018 article, VIOO cut its management expense ratio by a third to 0.10%.
SPDR S&P Regional Banking ETF (KRE)
You might not have noticed, but I managed to select one ETF from 10 different ETF providers. In this case, I’m going with State Street’s regional banking ETF, which has $4 billion in total assets and is up 32.9% YTD and 57.3% over the past 52 weeks.
The bank’s been very busy in the New England area the past two years. First, it acquired Boston-based investment bank Leerink in January 2019. Then it paid $900 million in early 2021 to acquire a Boston-based private bank, Boston Private Financial Holdings (NASDAQ:BPFH), which provides banking and wealth management services to customers in New England and California.
As Motley Fool contributor Bram Berkowitz said in November, Silicon Valley Bank makes short-term loans to venture capital and private equity businesses at a current rate of 3%. The bank has had net zero losses since launching these loans in the 1990s.
It’s managed to carve out a niche business that’s hard to replicate.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.