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Evergreen Tree of ETFs to Lighten Your Christmas

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It's a time for Christmas celebration and decorating the tree is a tradition. Given its significance of goodwill and love in this season of joy, we have built a Christmas tree with the help of ETFs, indicating shining lights and silver bells heading into 2021.

The Tree is Ready!

Let’s build the base first, which is the most valuable part, and of course the place where all gifts are to be found. There’s nothing’s more fitting than the broad market ETF SPDR S&P 500 (SPY - Free Report) , which tracks the major U.S. benchmark — the S&P 500 Index — to give a solid foundation to our tree. The index has witnessed historic twists and turns with the largest bull market turning into a bear market in March on the coronavirus outbreak, and then marking the fastest-ever recovery.

The S&P 500 hit a series of record highs lately and has been on a historic rally on the back of super-easy monetary and fiscal policies, vaccine optimism, and a potentially divided Congress though a surge in coronavirus cases is still weighing on investors sentiment. As such, SPY has returned more than 16% this year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

The bullish trend is likely to continue in 2021 with the rollout of vaccine. America has started immunizing people by giving Pfizer (PFE - Free Report) shots, developed in collaboration with the German biotechnology company BioNTech BNTX. The second vaccine from Moderna (MRNA - Free Report) also being given to Americans starting this week. The start of vaccination has strengthened investors’ confidence in the economy, as it will end the worst-ever pandemic, leading to a faster-than-expected recovery (read: Sector ETFs to Gain the Most on COVID-19 Vaccine Rollout).

Meanwhile, the cheap money flowing into the economy will continue to drive the stocks higher. The Fed has pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. Further, the latest fresh coronavirus relief package of $900 million will support the stock bulls. The combination of vaccine and easy policies will boost the cyclical sectors, which are tied to economic growth.

Therefore, an ETF from these sectors could be the best option to deck up our Christmas tree. Industrial Select Sector SPDR (XLI - Free Report) and SPDR S&P Retail ETF (XRT - Free Report) could form the fronds and leaves of the tree. Both ETFs have a Zacks ETF Rank #2. XLI is the most-popular ETF in the industrial space with AUM of $16.6 billion. It follows the Industrial Select Sector Index, holding 73 stocks in its basket. The ETF charges 13 bps in fees per year. On the other hand, XRT targets the broad retail sector by tracking the S&P Retail Select Industry Index. It holds 95 securities in its basket with AUM of $645.8 million and expense ratio of 0.35%.

For the top layer, we have chosen Invesco S&P SmallCap Momentum ETF XSMO as small caps continued to explode heading into the New Year as the economy seems on track for strong growth. Additionally, a low interest rate bodes well for small-cap stocks as it perks up economic activities and results in higher spending, thus boosting domestically focused companies, XSMO is up about 25% so far this year and has a Zacks ETF Rank #2 (read: 5 Best Small-Cap ETFs as Russell 2000 Tops S&P 500 YTD).

At the very top is the star ETF of 2020 — Invesco Solar ETF (TAN - Free Report) . The ETF has risen more than 235% this year and carries a Zacks ETF Rank #2, which suggests that outperformance will continue. With AUM of $3.2 billion, this ETF provides exposure to 30 solar stocks and charges 69 bps in annual fees (read: Go Greener in 2021 With Best ETFs & Stocks of 2020).


With the structure ready, we now have to decorate the tree with bells, candies and lights. While most of the ETFs could be part of this beautification, we have chosen those that have a top Zacks ETF Rank or are currently hot in the market. Notably, ARK Next Generation Internet ETF ARKW will add to the glitter and shine. The pandemic has driven the e-commerce boom and changed the consumer landscape into a purely digital one. People have chosen to stay indoors in order to avoid direct contact, which in turn has boosted demand for cloud computing, gaming, e-sports and streaming services.

ARKW is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure to cloud, enabling mobile, new and local services. The fund holds 52 stocks in its basket with AUM of $5.3 billion. It charges 76 bps in annual fees from investors (read: 8 ETFs That Have Gained More Than 100% in 2020).

The best ETF that could nicely fit the candy decor is SPDR S&P Biotech ETF (XBI - Free Report) , which has risen 59.2% this year and is likely to continue its uptrend in 2021 given hopes of COVID-19 vaccines from other firms like Sanofi (SNY - Free Report) , GlaxoSmithKline (GSK - Free Report) , Merck (MRK - Free Report) and Johnson & Johnson (JNJ - Free Report) . With AUM of $7.4 billion, XBI provides equal-weight exposure across biotechnology stocks by tracking the S&P Biotechnology Select Industry Index. It has 0.35% in expense ratio and carries a Zacks ETF Rank #2.

Now, to light up the tree, let’s add value ETFs like Vanguard Value ETF (VTV - Free Report) that will continue to brighten investors’ portfolio in 2021. The vaccine will help in keeping the economy recovery intact, boost consumer spending, and in turn lift value stocks. Additionally, value investing seems tempting given the improvement in corporate earnings growth, expectation for quicker inflation and rising bond yields. With AUM of $61.1 billion and an expense ratio of 0.04%, VTV has a Zacks ETF Rank #2.

The Christmas tree of top-ranked ETFs to brighten 2021 is now ready for investors. May it spread cheer!

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