After an exceptional stock market run last year, some investors might be wondering how much upside is there left in the market. But, according to Rusty Vanneman, chief investment officer at Orion Advisor Solutions, there are plenty of pockets that should do well in 2021. And three of his best ETFs focus exactly on those areas.
"Every year is interesting and this year is no exception," he said. "In the short term, we have an incredibly positive market in terms of the momentum. And of course, there are some good fundamental reasons for that, including anticipated, way-above-average economic growth and anticipated earnings growth this year. Combined with incredible liquidity, both monetary and fiscal — it's an incredible backdrop."
However, he pointed out, valuations are very high. This is also reflected in some of the best ETFs that hold large-cap growth stocks. While valuations can be defended if interest rates stay low, long-term rates have started to move higher.
"Longer-term, and this is what I'm really building portfolios for, U.S. markets (as represented by the main stock indexes) probably are not going to generate a super-attractive return in the next five to 10 years," he said. "That doesn't mean the average stock, however, won't do well."
Other Articles And Tables In This Special Report:
Top Funds' New Buys Of Stock To Watch
How This MFS Fund Excels Without Megacap FAANG Stocks
Best ETFs And Mutual Funds Begin 2021 With A Whimper
Six-Month Mutual Fund Leaders
Mutual Fund Category Performance
List Of Best ETFs Of 2021
The market has been dominated by large-cap growth names, he explained.
Best ETFs Could Be Driven By Performance, Cyclical Rotation
"A handful of names have really driven performance. I think if we do get this cyclical rotation, which makes sense given the economic acceleration, we're going to see smaller companies do well. We've been seeing this now for six months," he added.
He also expects more value-oriented companies and cyclical sectors to do well. While major index returns could be mildly positive or even flat over the next 10 years, Vanneman sees pockets in U.S. and global markets that "are incredibly interesting and could generate above-average returns and perhaps even double-digit returns."
One way to play small-cap and the value tilt is through Schwab Fundamental U.S. Company. A very high expected return for small caps combined with economic acceleration and attractive valuations should bode well for the $4 billion exchange-traded fund, he said.
FNDA differentiates itself from other small-cap funds in that its index is not market-cap weighted. Instead, it uses fundamental factors such as revenue, earnings, cash flow, dividends and share buybacks when including stocks. It overweights growth and value stocks that trade cheaply relative to their fundamentals. As a result, the fund achieves an indirect value tilt.
Tesla Is A Top-10 Holding At FDNA
In addition, FNDA's top 10 holdings comprise only 4% of the fund, making it a highly diversified investment. Interestingly, Tesla (TSLA) is one of its top-three holdings.
"Tesla, despite that it has a large market cap, its overall economic footprint still qualifies it as a small company," he said. "What makes a company big or small? Is it its market cap or its economic footprint in terms of how much money it actually makes. And so, that's why Tesla is in this index." Tesla is also on IBD's Leaderboard and Big Cap 20 lists.
FNDA was up 8.46% last year and has already advanced 9.3% YTD as of Feb. 4. It charges investors 0.25% a year to hold it.
Vanneman is also optimistic on financials. One of his best ETF picks is actively managed Davis Select Financial.
"The financial sector in general has been very beaten down," noted Vanneman. "Obviously, it's started to perform well as of late because the yield curve is steepening. The balance sheets are strong for a lot of financial companies."
Financials Attractive In Part To Their Discount
He said that financials currently trade at about a 40% discount to the overall market vs. a historical average discount of 20%. So, relative valuations and the interest rate backdrop look good.
The $161 million fund holds big financial names such as Capital One Financial, Berkshire Hathaway Class B, American Express, JPMorgan Chase and Bank of America.
Davis Select Financial was down 5% in 2020, but is up 4.75% YTD as of Feb. 4. Its annual fund management fee is 0.64%.
Looking outside of the U.S., one of Vanneman's best ETF choices is Invesco FTSE RAFI Emerging Markets. The $1.3 billion fund invests in the largest emerging market equities based on four fundamental measures: book value, cash flow, sales and dividends. Stocks with the highest fundamental strength receive the highest weight.
This fund focuses on emerging market value plays, explained Vanneman. In the past, emerging markets were predominantly a play on natural resources, commodities or real assets. Now, he said, they're a lot more diversified and hold much more technology than people expect.
While the fund was slightly down last year, it's advanced 5% YTD. Its expense ratio is 0.5%. Holdings include Taiwan Semiconductor, Alibaba, Tencent, Baidu and JD.com.
Vanneman said that in addition to their solid fundamentals and a global acceleration in economic growth, stocks in the fund have "similar growth but one-third of the value of the names in the S&P 500. It's truly a value play right now."
