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7 ETF Predictions for 2022

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After a great 2021 (for stocks), investors will now be mulling over what’s in store this year. The chances are high that optimism will be quelled a bit. The S&P 500 gained 26.89% in 2021, marking the gauge’s third straight positive year. The Dow and Nasdaq also recorded three-year winning streaks, advancing 18.73% and 21.39% for the year, respectively.

While such a lofty valuation may cause a retardation in the rally, reopening trade is pretty-much baked in now. The Fed is likely to cause a little bit of upheaval this year. The global economy, including the United States, has picked up momentum, though concerns prevail, especially in the form of rising inflation.

Against this backdrop, we have made some ETF predictions for 2022.

S&P 500 Gains Likely to Be in Single Digit But 10% Gains Possible

While the world is currently busy curbing the spread of the Omicron stain of COVID-19, the variant has been found to have a mild effect on patients. This finding, along with decent earnings growth, strong household and corporate cash pile, should keep the global economy and markets charged up in 2022.

Research house Oppenheimer expects the S&P 500 to rally to the 5,330 mark in 2022, marking an 11% gain from the current level.  However, Bank of America and Morgan Stanley expect the benchmark to end in 2022 slightly lower than the present. Rising rates and inflation have been held responsible for such subdued expectations. The average S&P 500 target for 2022 is 4,950, according to Bloomberg data, quoted on a Yahoo article.

In 2021, Goldman Sachs found that just five stocks—Apple, Microsoft, Nvidia, Tesla and Alphabet’s Google— contributed 32.6% of all S&P returns, per a fortune article. With the COVID-19 scenario losing severity, the stay-at-home tech segment may see lower prominence. This, in turn, may weigh on the S&P 500’s gains.

Inflation to Stay Hot in Early 2022

Renewed virus outbreaks in the form of Omicron, China’s zero-COVID policy and expected trade volatility during the Lunar New Year may continue to threaten supply chains for now, per trade credit insurer Euler Hermes, as quoted on CNBC. However, a slowdown in consumer demand, solid inventory levels and increased shipping capacity will likely normalize the supply chain in the second half of 2022.

In such a scenario, beat inflation with real-estate ETFs like Real Estate Select Sector SPDR ETF (XLRE - Free Report) , small-cap ETFs like iShares Russell 2000 ETF (IWM - Free Report) , bank ETFs like Invesco KBW Bank ETF (KBWB - Free Report) and inflation-protected ETFs like ProShares Inflation Expectations ETF (RINF - Free Report) (read: Inflation to Stay Hot in Early 2022: ETF Strategies to Win).

Oil Price to Remain Range-Bound

Several factors, including OPEC’s output decision and shale production, will rule the oil market in 2022. While production is increasing gradually to meet higher demand, virus worries are putting a cap on the oil rally.

A survey of 35 economists and analysts forecast Brent crude would average $73.57 a barrel in 2022, about 2% lower than the $75.33 consensus in November. It marked the first reduction in the 2022 price forecast since the August poll. WTI  crude is projected to average $71.38 per barrel in 2022 versus the previous month's $73.31 consensus, per a CNBC article.

Fed Rate Hike in the Cards

The Fed is expected to enact its first rate hike in three years in about two months to counter inflation. The U.S. central bank already paced up QE tapering, upped its economic growth projections, raised its inflation outlook and cut the unemployment rate projections.

The Fed’s December meeting projections revealed that 12 out of 18 FOMC members expect at least three rate increases in 2022. All 18 policymakers have also indicated the possibility of at least one rate hike before 2022 ends (read: Warm Up Your Portfolio With These ETFs This Winter).

If the Fed opts for faster rate hikes, bond ETFs like iShares 20+ Year Treasury Bond (TLT - Free Report) and dividend ETFs like SPDR S&P Dividend ETF (SDY - Free Report) may face pressure. Meanwhile, ProShares High Yield—Interest Rate Hedged ETF (HYHG - Free Report) is poised to benefit.

Sectors to Look for Gains: Financials, Real Estate, Industrials, Materials

A clear beneficiary of rising rates is banks. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pay less on deposits, thereby leading to a wider spread. This expands net margins and increases banks’ profits.

Home prices have been trending up on higher demand and an uptrend in inflation. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which is pushing up shelter costs. This means exposure to real estate could be inflation-beating. Interest rates are still at pretty low levels, though gradually increasing. This makes high-yielding real estate investing lucrative. Key Real estate ETF(VNQ - Free Report) has a yield of 2.56% currently (read: Real Estate ETFs at All-Time Highs: Here's Why).

More capex and activities are likely in 2022, which will boost industrial ETFs like (XLI - Free Report) . Since industrial activities will be on the rise, demand for materials should go up. Biden’s massive infrastructure plan is another plus for this segment. Investors can thus play materials ETF (XLB - Free Report) .

Europe Stocks Great Bets for 2022

The pan-European STOXX 600 index jumped 22.4% in 2021, marking its second-best yearly performance since 2009. Notably, the Fed is likely to be more hawkish in 2022 than the ECB, which is likely to favor European assets over U.S. ones. Hence, we expect WisdomTree Europe Hedged Equity ETF (HEDJ), Franklin FTSE Europe Hedged ETF FLEH and WisdomTree Europe SmallCap Dividend ETF (DFE - Free Report) (yields 2.5%) to be winning bets for 2022.

Virus or Not, Mega Cap Techs Are Safe Bets in 2022

The technology sector was a great beneficiary of the COVID-led stay-at-home trend. Even if the COVID-19 threat cools down, big tech should be in a sweet spot. CNBC’s Cramer explained that big-tech names like Google-parent Alphabet (GOOGL) and Microsoft’s (MSFT) business models are not that responsive to changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on.

“New normal” trends like online shopping, increasing digital payments, cloud computing, the ongoing infusion of AI, machine learning and IoT are sure to stay here for long. So, you can track the mega-cap tech ETF (XLK - Free Report) .