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5 Best ETF Investing Ideas for 2021

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After peaking to end 2020, U.S. stocks had the worst start to a year in five years in the first trading session of 2021. However, it rebounded strongly and capped the weekly gains in the first week of this year despite the turmoil in Washington and surging coronavirus cases. Notably, the S&P 500 topped 3,800 for the first time while Nasdaq crossed the 13,000 mark (read: 5 Big ETF Stories of 2020 Worth Watching in 2021).

Most of the gains were driven by positive COVID-19 vaccine data as well as hopes of a bigger fiscal package and infrastructure spending under a Democratic-led U.S. Congress. President-elect Joe Biden vows to unveil an economic stimulus package worth trillions of dollars, which would include relief for unemployed Americans and rent forbearance for tenants, once he enters the White House, after Democrats won control of the Senate. Biden also called for raising the minimum wage to $15 - a campaign promise - and for sending out $2,000 in direct cash payments. Additionally, super easy policies are driving the bulls.

Given this, we have highlighted some investing ideas that could prove to be extremely beneficial for investors in 2021:

Make Cyclical Sectors Your Friend

The wide rollout of vaccines and trillions of dollars flowing into the economy has brought back the lure for the cyclical sectors. This is especially true as a vaccine is expected to end the pandemic that should lead to a swift recovery in economic growth, leading to higher spending and confidence. As these sectors are closely tied to economic activities and outperform when the economy improves, these are expected to benefit the most (read: U.S. Manufacturing Rebounds: Sector ETFs That Deserve Thanks).

Some of the top-ranked ETFs from these spaces are Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Industrials ETF (VIS - Free Report) and Materials Select Sector SPDR ETF (XLB - Free Report) , each currently carrying a Zacks ETF Rank #2 (Buy).

Bet on Biden Friendly Sector

A few sectors like cannabis and clean energy are expected to skyrocket under Biden administration. The government has the friendliest political environment for the cannabis industries in U.S. history, as it will expedite the legalization of marijuana at the federal level, thereby providing a boost to the industry. Meanwhile, Biden plans to pump $2 trillion into green energy over four years to build solar panels, charging stations and more; vows to rejoin the Paris climate in “exactly 77 days,” and aims for net-zero emissions by 2050.

Given this, the most-popular funds from these two industries — ETFMG Alternative Harvest ETF (MJ - Free Report) , AdvisorShares Pure US Cannabis ETF MSOS, AdvisorShares Pure Cannabis ETF (YOLO), iShares Global Clean Energy ETF (ICLN - Free Report) ), Invesco WilderHill Clean Energy ETF (PBW - Free Report) and First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) — seem to be excellent choices (read: Cannabis ETFs Soar on News of Democrat's Winning Senate).

Focus on Quality

Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Some of the funds in this category, iShares MSCI USA Quality Factor ETF (QUAL), Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barrons 400 ETF (BFOR - Free Report) are worth a look.

Emphasis on Dividends

The ultra-low rates will continue to raise the appeal for dividend investing. The Fed has pledged to keep interest rates near zero and will continue to buy at least $120 billion of bonds each month until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. Additionally, a surging number of new cases as well as geopolitical tension will continue to weigh on investors’ sentiment.

In such a scenario, dividend securities are the major sources of consistent income for investors, creating wealth. These stocks often play a defensive role in a portfolio and can reduce volatility in turbulent times or uncertain markets. The companies that pay high dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. While there are several dividend ETFs, here are some of the top-ranked products — Vanguard High Dividend Yield ETF (VYM - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) . The duo has a Zacks ETF Rank #2.

Add U.S. Small Caps

Given that the small-cap companies are closely tied to the U.S. economy, these outperform on improving American economic health. A low interest rate and vaccine optimism bode well for small-cap stocks as these would push up economic activities and result in higher spending, thus boosting domestically focused companies. A bunch of Zacks ETF Rank #1 (Strong Buy) ETFs, namely Vanguard Small-Cap Growth ETF (VBK - Free Report) and iShares Russell 2000 Growth ETF (IWO - Free Report) could be excellent picks (read: 5 Small-Cap ETFs & Stocks to Make the Most of January Effect).

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