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4 Top-Ranked ETF Underperformers of 2021 Could be Winners in 2022

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The S&P 500 so far had a stellar year, up almost 28%. Widespread vaccination, more oncoming of therapies and booster shots, reopening of economies, President Biden’s infrastructure bill and Fed’s massive support helped this rally possible.

Still, the year did not go well for all stocks and ETFs. Worries over Omicron sent ripples through the stock indexes in the fourth quarter. Some areas took a beating due to rising rate worries (due to sky-high inflation and talks of Fed policy tightening) in the middle of the year.

In fact, the Federal Reserve announced in December it will speed up the tapering of asset purchases (that started from November). In its December meeting, the Fed revealed that it plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and $120 billion from the start of the pandemic through November.

Against this backdrop, below we highlight a few ETFs that returned less than the S&P 500 so far in 2021 and could be meaningful gainers in 2022. These ETFs have a Zacks Rank #1 (Strong Buy) or #2 (Buy).

Vanguard Russell 2000 ETF (VTWO - Free Report)

Small caps might outperform ahead, given an improving economy, cheaper valuation, availability of more COVID therapies, vaccines and testing kits. The rising inflationary backdrop is also great for smaller-caps than the larger ones.

Rank #2

P/E: 14.42x

YTD performance: Up 14.4%

Vanguard Russell 1000 Value ETF (VONV - Free Report)

2022 is likely to produce rising rate environment if there is no massive flare-up in COVID cases. A Fed policy tightening will likely push up rates. Value ETFs fare better in a rising rate environment.

Rank #2

P/E: 16.25x

YTD performance: Up 23.3%

Vanguard Extended Market ETF (VXF - Free Report)

The underlying S&P Completion Index contains all of the U.S. common stocks regularly traded on the New York Stock Exchange and the Nasdaq over-the-counter market, except those stocks included in the S&P 500 Index.

Rank #2

P/E: 17.80x

YTD performance: Up 14.09%

Invesco S&P MidCap Momentum ETF (XMMO - Free Report)

The underlying S&P Midcap 400 Momentum Index is composed of securities with strong growth characteristics selected from the Russell Midcap Index. The mid-cap segment offers the best of the both worlds — large caps and small caps. Notably, the smaller-cap stock has the potential to rally as the domestic economy gains steam. Moreover, smaller stocks are more undervalued. On the other hand, large caps offer safety and are the beneficiaries of global economic reopening. Since mid-caps have the attributes of both segments, the segment has more room to run.

Rank #1 (Strong Buy)

P/E: 14.75x

YTD performance: Up 15.69%