At a glance…
For most of the 2010s, it was relatively smooth sailing for investors. In the wake of the historic March 2009 stock market crash, all three major US indexes ended up at least quadrupling in value, if not delivering even more robust returns. Then the coronavirus disease 2019 (COVID-19) pandemic came along and turned everything on its head once more, upsetting the economy, labour force, and stock market like no other crisis in living memory.
Uncertainties from COVID-19 pushed the broad-based S&P 500 into bear market territory in just 17 trading sessions, marking the fastest decline into a bear market in history. Ultimately, the benchmark index fell 34% in a mere 33 calendar days before rebounding to where it is today.
A bear market is the perfect opportunity for investors to load up on high-quality ETFs
Stock market corrections of all sizes have historically proved to be excellent buying opportunities for long-term investors. Although we’ll never know ahead of time when a correction will occur, how steep the decline will be, or how long it would take to hit the bottom, we do have plenty of data showing that the S&P 500 eventually puts all corrections (and bear markets) into the rear-view mirror.
The real question is not if you should buy equities, but rather what you should buy.
It’s understandable if you feel uncomfortable picking individual stocks, whether it be from a lack of investing knowledge, or from the especially turbulent volatility that has plagued the markets in recent times. That’s where exchange-traded funds (ETFs) come into play. An ETF is a single security that contains a basket of stocks with a specific focus – i.e. based on market cap, growth or value, industry, or some other broad theme. Investors like you buying into an ETF should be able to gain instant diversification or focus without having to research a dozen or more companies within an industry beforehand.
Check out our top picks for 2021 and beyond below
Global X Cloud Computing ETF (NASDAQ:CLOU)
One of the more unstoppable industries in the years (or decades) to come is arguably cloud computing. As businesses continue to move beyond their static office spaces and toward an environment where data can be accessed anywhere by employees, the need for software-, platform-, and infrastructure-as-a-service is only going to grow. That’s why the Global X Cloud Computing ETF (NASDAQ:CLOU) should be on your buy list.
As you might imagine, the Global X Cloud Computing ETF is going to give investors an opportunity to be on the cutting edge of cloud technology innovation, all without having to be an expert on the various layers of cloud services. It currently holds 36 different stocks, only 2 of which have a weighting of more than 5%. This means you’re getting a pretty even keel of opportunity, with everything from established infrastructure plays like Amazon to software-as-a-service kingpin Shopify in the mix.
To be clear, this isn’t a value ETF. You’ll be buying to take advantage of the aggressive growth in cloud services, growth will likely accelerate because of conditions from the COVID-19 pandemic. That means you’ll need to put up with a high trailing price-to-earnings ratio, as well as net expense ratio of 0.68%, which isn’t exactly low. However, there would be tremendous payoff if cloud computing continues its double-digit percentage growth for the foreseeable future.
As a growth ETF, there may potentially be greater long-term returns. However, it is also likely to come with more risk.
VanEck Vectors Gold Miners ETF (NYSEMKT:GDX)
In the investment world, “this time it’ll be different” is often a dangerous phrase, but when it comes to precious metal–mining companies, this time it may very well be different, which is why the VanEck Vectors Gold Miners ETF (NYSEMKT:GDX) is worth buying.
Generally speaking, physical gold and gold miners perform their best toward the tail-end of a recession and early on during a recovery. In other words, we’re nearing the sweet spot for precious-metal miners. However, gold-mining stocks tend to underperform the broader market when the economy is firing on all cylinders, leaving them as long-term laggards. But this time could be different.
Conditions are ripe for a gold market boom. Global bond yields remain historically low, providing few avenues for investors to lock in guaranteed gains. Even if conservative investors find a positive-yielding bond, chances are that it won’t outpace the inflation rate, thereby leading to real-money losses. Combined with unlimited quantitative easing in the United States and continuing uncertainty from the COVID-19 pandemic, and you have a recipe that makes gold the logical store of value for the foreseeable future.
However, since physical gold offers no yield, the smartest way to play this rise in value is by purchasing gold miners, or more specifically, the VanEck Vectors Gold Miners ETF. Gold prices could keep climbing comfortably for the next five years. That would be great for mining companies that are able to leverage any increase in the physical price of gold.
The growth and returns on gold mining companies depends not just on the price of gold, but also on expected future earnings, which means that effective management, production costs, and other factors also play a role.
ALPS Medical Breakthroughs ETF (NYSEMKT:SBIO)
Another ETF that the smartest investors will be buying and holding is the ALPS Medical Breakthroughs ETF (NYSEMKT:SBIO).
While there are a number of diversified pharmaceutical and biotech ETFs that investors can buy, this one is unique. It holds around six dozen US-based drug developers that typically range in market cap between $200 million and $5 billion and have at least one experimental drug in phase 2 or phase 3 trials. The ALPS Medical Breakthroughs ETF also screens for sustainability – drug developers aren’t added unless they have enough cash to fund their operations for at least two years.
It’s important to point out that most clinical trials are doomed to fail, which is why betting on any single clinical-stage biotech or pharmaceutical company can be risky. However, when you own a basket of nearly six dozen under one security, all it takes is a few big wins for the ETF to deliver substantive returns.