Obviously, no one has a crystal ball that can predict how the stock market, or any part of it, will behave in a given time frame. After all, in March 2020, who would have predicted that the market would have closed the year higher than where did it start?
That said, there are some actions that have been the main beneficiaries of the stay-at-home economy and others that may benefit more than others, as the COVID-19 pandemic begins to (hopefully) decrease in 2021. With that in mind , there are some index fund ETFs that could significantly outperform the S&P 500 this year, and here are three that I’m very optimistic about.
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One of the worst performing sectors in 2020
The housing market was one of the worst performing parts of the stock market in 2020. In fact, the Vanguard Real Estate ETF (NYSEMKT: VNQ) produced a negative total return of 4.6% in the year, presenting a performance significantly inferior to the total return of 18% in the S&P 500.
To be sure, there were good reasons for the poor performance. Many real estate investment funds, or REITs, have properties that depend on people’s willingness and ability to go places – such as hotels, malls, shopping centers, etc.
However, REITs can also be some of the biggest beneficiaries, as the pandemic (hopefully) will end in 2021. There is a huge pent-up demand for travel, shopping and spending money on experiences, and this can translate into a big boost to the real estate sector.
Large stocks rose in 2020, while many small caps were left behind
The second index fund that I think could beat the market in 2021 is the IShares Russell 2000 ETF (NYSEMKT: IWM).
Most of the largest US companies held up very well during the pandemic. Apple (NASDAQ: AAPL) saw strong demand for its products, Microsoft (NASDAQ: MSFT) did not experience many sales disruptions and Amazon (NASDAQ: AMZN) was one of the biggest beneficiaries of the retail disruption.
However, most of the so-called “reopening shares”, which could benefit most from the return to normality, are not among the largest in the market. Think of hotel stocks like Ryman Hospitality Properties (NYSE: RHP), entertainment actions like Dave and Busterin (NASDAQ: PLAY)and mall operators like Tanger Factory Outlet Centers (NYSE: SKT). (Note: all three Combined are about 0.3% the size of Apple.)
Of course, there are some large-cap companies that could benefit from the reopening. Marriott International (NASDAQ: MAR) it is a name that comes to mind. But the point is that the small cap world is full of stocks reopening, while the mega cap world has disproportionately few.
Banks could benefit from the reopening
Finally, another sector that was defeated by the pandemic is the financial sector, so I think the Financial selection sector SPDR ETF (NYSEMKT: XLF) it may outperform as the world gradually returns to normal.
Banks have been hit hard by the pandemic for two very good reasons:
- Although the banking business is complex, the main way for banks to make money is to charge interest on loans. With a record low interest environment, bank profits are under pressure.
- The pandemic creates a high level of default risk, as unemployed borrowers may have trouble repaying their loans.
However, both may change over the course of 2021. We are already starting to see interest rates rise and I would expect more of the same as the pandemic gradually ends. And, as unemployment starts to fall to pre-pandemic levels, the default risk faced by creditors tends to decrease with this.
All of these are great long-term choices, no matter what happens in 2021
As a final thought, although I think that all three have a good chance of beating the market in 2021, I’m not saying that you should plan to keep them for a year and then profit. All three are excellent index funds that can create long-term wealth in your portfolio.