An ETF expert breaks down his top 5 predictions for the industry in 2021 — including 4 funds that are among the best to buy, and why ARK Invest won't be able to repeat its dominance

  • 2020 was the most lucrative year yet for the exchange-traded fund industry, with record inflows of $507 billion.
  • The ETF Store's Nate Geraci shares five predictions for the industry in 2021 with the stock market now sitting near all-time highs. 
  • Visit Business Insider's homepage for more stories.

2020 was the most lucrative year yet for the exchange-traded fund industry, with inflows hitting a record $507 billion as investors funneled money into the products — especially those run by the team at ARK Invest.

But with the market now sitting near all-time highs, what's in store for the ETF industry in 2021?

Broadly speaking, ETFs will see continued growth, according to Nate Geraci, president of The ETF Store, a registered investment advisor .

"Big name fund companies like DFA, T. Rowe Price, and Allianz are only now aggressively entering the space. ETF fees are still dropping," Geraci said in a recent post on The ETF Educator. "Perusing the 300+ new ETF launches last year shows that innovation is alive and well in the Silicon Valley of asset management.

"All of this is to say that the ETF trends witnessed over the past several years will continue in 2021, if not quicken."

More minutely, Geraci also shared five predictions for the industry in the year ahead.

5 ETF predictions for 2021

With the global economic recovery expected ahead — and with US stocks at record highs and the dollar weakening amid massive government stimulus — Geraci first says that he expects emerging-market ETFs to see stronger performance than in years past.

"When the dollar is weak, emerging markets outperform. There's more to it than that, but the relationship holds pretty well historically," Geraci said. "With unprecedented (yes, I'm bringing this word into the new year) fiscal and monetary stimulus, do you really want to bet on the dollar right now?"

In terms of inflow, he said he expects the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) to lead. But he also recommended the WisdomTree Emerging Markets ex-State-Owned Enterprises ETF (XSOE) and the Alpha Architect Freedom 100 Emerging Markets ETF (FRDM) because they don't have exposure to China and state-owned enterprises.

Second, Geraci predicts that cannabis ETFs will see a boost with the Biden administration in power.

He said that government budget deficits will also make legalization more attractive as states seek more tax revenue. If things trend this way, it could also lead to institutional investors putting more money into the industry, Geraci said.

Third, Geraci says that ARK Invest will have a hard time repeating the success they saw in 2020. Five of the firm's ETFs returned more than 100% and founder Cathie Wood emerged as one of the top-five fund managers of last year. 

"Betting that ARK can't duplicate last year's staggering success may seem like an easy prediction, but the firm's Founder and Chief Investment Officer Cathie Wood has made naysayers look foolish for several years now," Geraci said.

He continued: "The primary basis for this prediction isn't that ARK and Cathie Wood can't maintain a hot hand, but instead, that a global economic recovery takes hold. If that happens, I expect a rotation into value stocks. That would present a headwind for ARK's growth-dominated strategies. Even if a recovery doesn't take hold, the stocks held by ARK aren't exactly cheap right now. How much further can they run?"

Geraci also pointed to S&P Dow Jones Indices' SPIVA index, which measures the sustained outperformance of actively managed funds. It has found that outperformance typically doesn't last long.

According to a December report from the firm, there is "a 98.4% chance that a top-quartile fund will not stay in the top quartile for the next four years."

Next, Geraci believes Dimensional Fund Advisors, with their three newly launched ETFs and six more on the way, will see success.

This is thanks in large part to the firm's popularity, he said.

"DFA arriving late to ETFs is like Brad Pitt walking through the door of an Oscars after-party at 1am. Both are immediately the center of attention and it doesn't matter that the party is already in full swing with people dancing on the tables," Geraci said. 

"There are only a handful of firms that could have success in ETFs no matter when they got involved," he continued. "I think DFA is one of them."

Lastly, Geraci predicts that we will see a bitcoin ETF come to fruition in 2021.

In addition to his own arguments for why the Securities and Exchange Commission (SEC) should finally allow a bitcoin ETF, Geraci pointed to the fact that President-elect Biden will appoint a new SEC Chair this year, and there is the possibility that its new leader is crypto-friendly. 

A top contender for the job is SEC Commissioner Hester Pierce, who is on the record as being in favor of a bitcoin ETF.

Geraci said bitcoin's volatility is the biggest thing holding the SEC back from approving an ETF.

"Bitcoin has been on a Rocketship to the moon, returning 300+% in 2020 and already up 15% in 2021. If the price of bitcoin quickly reverses course and comes down to earth before a bitcoin ETF is approved, that might spook the SEC who clearly doesn't want the headline risk," Geraci said.  

He added: "Otherwise, given the premiums in products such as the Grayscale Bitcoin Trust (GBTC) and Bitwise 10 Crytpo Index Fund — which retail investors can easily access — there's simply no reason a bitcoin ETF shouldn't be approved."

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