Ringing In 2021 ETF Market Forecasts

Crystal balls come out this time of year, predicting where markets go from here.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

’Tis the wonderful season for market forecasts.

After this year, when “unprecedented” became the most-used word to describe what we experienced as people and as investors, you can imagine the wide range of outlooks and predictions circulating these days.

Are we beginning a new cycle or still working on ending an old one? Is this going to be a V-shaped recovery, a W-shaped one or just a squiggly line? Are growth stocks overrun to the upside, or is growth really the only way to go?

In a year of surprises, market outlooks feel a little different, because everyone’s crystal ball seems murky at best.

The fact is, no one saw what happened in 2020 coming when we were going through this “what to expect” exercise at the end of 2019, so we may be a tad more cynical this year.

That said, as investors, we love to have a sense of where the market is headed, be that sense real or imagined. So, let’s dive into what some of the biggest ETF asset managers are saying.

BlackRock’s 3 Themes

In its outlook for 2021, BlackRock set the stage for what it calls “the new investment order.”

“The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate across four dimensions: sustainability, inequality, geopolitics and the joint macro policy revolution. We believe this calls for a fundamental rethink of investment portfolios – starting now,” BlackRock said. (You can find the entire outlook here.)

In practice, this means rethinking portfolios along three key themes. First, expect lower real yields even as economic growth picks up pace post-pandemic—an environment that’d be supportive for equities.

According to the firm, COVID vaccines will help fuel overall confidence in the economy’s ability to grow, and in consumers’ ability and willingness to consume.

From a shorter-term tactical perspective, BlackRock suggests overweighting U.S. and emerging market equities, lightening up on European stocks, and buying into credit.

Some ETFs that’d apply here if you were to implement this call include the iShares Core S&P 500 ETF (IVV) and the Vanguard Total Stock Market ETF (VTI), among other U.S. equity ETFs; the iShares Core MSCI Emerging Markets ETF (IEMG)—there are 214 emerging market ETFs to choose from—and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD), the largest corporate bond ETF in a segment populated by 259 ETFs. Choices abound.  

Quality & Small Caps & China

In the factor investing space, BlackRock is betting on quality and small caps at the expense of low volatility.

For example, ETFs that’d fit the bill would include the iShares MSCI USA Quality Factor ETF (QUAL) and the iShares Russell 2000 ETF (IWM) versus the iShares MSCI USA Min Vol Factor ETF (USMV). Here, again, the world is your oyster, with more than 1,000 smart beta ETFs offering you ways to navigate the factor space.

The firm is also underweighting government bond exposure for now, so lighten up on your Treasury load.

Second, BlackRock sees a changing global opportunity in both single-country and supply chain plays. The key investment idea is to country-diversify your portfolio wisely, but more specifically, go big on China—“above-benchmark China exposures.”

That may be surprising to some. The recent trade tensions between the U.S. and China, and the fallout over the pandemic, have put many investors across a divide when it comes to China. But BlackRock is in. “We are overweight Asia ex-Japan equities and Asia fixed income on the region’s effective virus response, and favor assets exposed to Chinese growth,” the company said.

And finally, in line with the firm’s earlier-year strong stance on environmental, social and governance investing (ESG), BlackRock’s forecast says the future is going to be about sustainability. Invest accordingly.

Barbells, Risk & Cooperation

State Street Global Advisors—the firm behind behemoths such as the SPDR S&P 500 ETF Trust (SPY), the Sector SPDRs and the SPDR Gold Trust (GLD) among others—begins its outlook for 2021 by setting the stage with a borrowed quote from Charles Dickens: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

You won’t find a more beautiful use of literature to describe investor sentiment as we enter a new calendar year. Kudos to State Street.

The firm goes on to detail what it sees as “robust” economic growth ahead, with value cyclical stocks, small caps and emerging markets continuing to catch up to the massive rally in U.S. growth names, giving the current market strength the “breadth” it needs to really expand. It’s a rosy outlook.

Unless, of course, this recent market action is nothing but another “head fake.”

Delicate Balance

The takeaway? That it could be either. So, balance it out. “It’s not about cyclical value or secular growth in 2021. Rather, it’s about balancing cyclical and secular change in investment portfolios.”

Even more challenging is going to be the hunt for income, the firm says. After years of lowering rates, fixed income assets aren’t the ballast of safety and diversification they used to be. Finding income has meant taking on more risk, and in 2021, if rates do tick up as some expect, you also need to brace for bond prices to fall.

“Navigating an increasingly difficult fixed income environment will continue to be a struggle for many investors in 2021. There are no easy choices — only tradeoffs. Investors may need to use a variety of fixed income investments — including agency mortgage-backed securities, emerging market debt, senior loans and preferreds — to pursue scarce income, while carefully balancing risks.”

In application, this outlook would suggest fixed income investing requires looking beyond aggregate-type funds such as the SPDR Portfolio Aggregate Bond ETF (SPAB), and exploring other areas accessed by funds such as the SPDR DoubleLine Total Return Tactical ETF (TOTL), the SPDR Portfolio Mortgage Backed Bond ETF (SPMB), the SPDR Blackstone / GSO Senior Loan ETF (SRLN) as well as the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and the iShares Preferred and Income Securities ETF (PFF), to name a few.

Luckily, ETF investors have 444 fixed income ETFs to choose from to accomplish this call to diversify your fixed income allocation. State Street helms several of these funds. (You can read the entire outlook here.)

Invesco’s ‘Choose Your Adventure’

For Invesco, things next year could get very bullish, or very bearish or boringly neutral. The firm’s market outlook for 2021 is a choose-your-adventure forecast.

The ETF manager behind the Invesco QQQ Trust (QQQ), among others, details “three potential paths for markets in 2021,” all of them built on a base-case scenario where economic growth chugs along globally, but the recovery is slow and uneven.

This base-case calls for cyclicals, value names and small caps to lead the way—the type of trade many associate with the early days of an economic boom. To implement this, think of size and style ETFs that offer access to these themes.

For example, the pureplay Invesco S&P 500 Pure Value ETF (RPV) or any other of the 74 value ETFs on the market today. The biggest small cap fund, the iShares Russell 2000 ETF (IWM) is only one of 129 small cap ETFs available to you. For cyclical sectors, there are more than 500 sector ETFs on the market, allowing you to navigate this space as broadly as owning the Select Sector SPDRs or as narrowly as you want.  

Invesco’s base outlook also calls for opportunity in credit markets—think corporate bond ETFs—and in real assets. The bullish and bearish variations of this base case suggest adjusting portfolio allocations accordingly. (You can read the outlook here.)

Similar But Different

There’s a lot of common ground among these three 2021 outlooks, which are just a small sampling of the thought leadership offered to investors everywhere this time of year.

They each build upon where we stand today, extending on themes that have worked in recent weeks, all while offering ample latitude into the forecast for things to go … well, wherever they may go.  

Invesco, perhaps, best exemplifies the challenge of predicting the future, which in itself is a lesson.

At first glance, the firm’s outlook almost seems to mock the exercise of forecasting markets by essentially saying 2021 could be the year of the bulls, of the bears or of the neutrals.

But it could be that this anything-goes type of educated thinking based on historical norms and on an “unprecedented” year is perhaps the most useful to investors. We are, first, reminded of something we’ve always known: Nobody has a crystal ball. Nobody really knows what happens next.

Second, and most importantly, we are called to remember that different assets and different parts of the market may do better or worse than others at different times. Short-term tactical plays may flare up here and there, but regardless of the path, a well-diversified risk-balanced portfolio is the only way to go if you want to sleep well at night in the new year.

Now, let’s hope we can get through 2021 without ever having to use the word “unprecedented” again.   

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.