The investing themes that defined stock markets in 2020, such as disruptive technologies and the genomic revolution, could likely remain big trends in the year ahead. How can investors use exchange-traded funds (ETFs) to tap into these investment themes?
The global ETF market took a record $499bn in net flows at the end of last year, boosting its holdings to just under $5.5trn, according to data from Morningstar.
In terms of asset class, equities were the most popular in December, with a 75.6% market share, as they attracted estimated net flows of $231.8bn for 2020 — just short of a new record for equity ETFs. As for investing themes, the best performing funds last year were in solar, disruptive innovation, lithium and battery technology, genome and semiconductors, as indicated by data from Opto’s Thematic ETF Screener.
Equity ETF's estimated net flows in 2020
Whether these themes will continue to be the top performing trends in 2021 remains to be seen but, as of 20 January, the best performing funds in the past week were China tech, genome, cannabis, healthcare innovation, biotech, robotics, fintech and disruptive innovators.
What’s driving the growth in these investing trends, and which funds should investors consider in order to tap into them?
Cannabis stocks on a high
While the cannabis industry was not a top-performing theme last year, the shift to a new US administration has significantly improved sentiment so far in 2021. The Global X Cannabis ETF [POTX] had declined by 30.6% in 2020, but was up 41.63% since the turn of the year (through 22 January’s close).
Launched in 2019 by Global X ETFs, the cannabis fund invests in companies involved in the legal production, growth and distribution of marijuana. It has holdings in stocks such as Tilray [TLRY], Aurora Cannabis [ACB], Aphria [APHA] and Cronos Group [CRON], which have all seen gains since the announcement of Tilray and Aphria’s plans to merge in December.
“The biggest upside surprises are going to come from the genomic space, and that’s because the convergence of DNA sequencing, artificial intelligence, and gene therapies are going to cure disease,” Catherine Wood, CEO of Ark Invest, told Bloomberg. So far, Wood’s statement has held true.
"The biggest upside surprises are going to come from the genomic space" - Catherine Wood, Ark CEO
The Ark Genomic Revolution ETF [ARKG] was one of the best performing funds in 2020, following a meteoric 180.3% rise last year. So far in 2021, the Genomic ETF had continued to climb by 18.68% as of its 22 January close, boosted by top holdings in CRISPR Therapeutics [CRSP], Twist Bioscience [TWST] and Pacific Biosciences of California [PACB].
Steeper yield curves spur rush to regional banks
The 10-year Treasury yields have continued to steepen so far in 2021, as COVID-19 vaccine hopes paired with the $1.9trn stimulus plan proposed by US president Joe Biden drive long-term yields even higher. Given the macro outlook, investors seem to be betting on the likely expanded margins and profits of these firms.
The SPDR S&P Regional Banking ETF [KRE] offers exposure to regional US banks such as First Republic Bank [FRC], SVB Financial Group [SIVB] and PNC Financial Services [PNC], as well as other diversified financial plays. Despite falling 7.4% in 2020, the banking fund has gained 12.09% since the turn of the year (through 22 January).
Betting on disruptive technologies
The next-generation technologies theme has been a top play for growth-hungry investors, following the Ark Innovation ETF’s [ARKK] 152.7% gain last year. However, so far in 2021, the Direxion Moonshot Innovators ETF [MOON], which was launched in November last year, has outperformed its peer.
The fund was up 23.65% as of 22 January, thanks to the gains from holdings such as MicroVision [MVIS], Vuzix Corporation [VUZI], Tenable [TENB] and FuelCell Energy [FCEL]. Investors’ interest in disruptive technologies has grown at rapid speeds, with the three-month old Invesco Nasdaq Next Gen 100 ETF [QQQJ] already boasting $790.3m in assets under management as of 22 January.
Invesco Nasdaq Next Gen ETF's AUM
The rise of China’s tech giants
The world-beating market rally in China’s stock market continued to lift the CSI 300 index to new all-time highs at the start of 2021. The latest equity surge has pushed the Invesco China Technology ETF [CQQQ] to be a top-performing fund so far this year — it was up 17.16% as of 22 January’s close.
High-flying Chinese technology stocks such as Tencent  and Baidu [BIDU], both of which are key holdings in the fund, have been strong performers amid the coronavirus pandemic. However, the government’s anti-trust crackdown on Alibaba [BABA], which is not in the fund, could be a headwind for investors.
Looking to compare the performance of global themes against each other? Check out Opto’s thematic ETF screener tool.