Obviously, no one has a crystal ball that can predict how the stock market, or any part of it, will perform over any given time interval. After all, who would have predicted in March 2020 that the market would have closed the year higher than where it started?
That said, there are some stocks that have been the biggest beneficiaries of the stay-at-home economy, and others that could benefit more than others as the COVID-19 pandemic (hopefully) starts to wane in 2021. Mind you, there are some index fund ETFs that could significantly outperform the S&P 500 this year, and here are three that I’m very optimistic about.
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One of the worst performing sectors in 2020
Real estate was one of the worst performing parts of the stock market in 2020 Vanguard Real Estate ETF (NYSEMKT: VNQ) produced a negative total return of 4.6% for the year, dramatically less than the 18% total return in the S&P 500.
Certainly, there were good reasons for the poor performance. Many real estate mutual funds, or REITs, own properties that depend on people being willing and able to go places – think hotels, malls, shopping centers, etc.
However, REITs could also be some of the biggest beneficiaries as the pandemic ends (hopefully) in 2021. There is a huge pent-up demand to travel, shop and spend money on experiences, and this could translate into a major boost to the real estate industry.
Large stocks rebounded in 2020, while many small caps lagged
The second index fund that I think could beat the market in 2021 is it iShares Russell 2000 ETF (NYSEMKT: IWM).
For the most part, the largest US companies held up quite well during the pandemic. Apple (NASDAQ: AAPL) saw strong demand for its products, Microsoft (NASDAQ: MSFT) did not experience much sales disruption, and Amazon (NASDAQ: AMZN) was one of the biggest beneficiaries of the retail disruption.
However, most of the so-called “reopening stocks” that could benefit the most from a return to normal are not among the largest companies in the market. Think hotel stocks such as Ryman Hospitality Properties (NYSE: RHP), entertainment stocks such as Dave & Buster‘s (NASDAQ: PLAY), and shopping center operators such as Tangier Factory Outlet Centers (NYSE: SKT). (Note: all three combined are about 0.3% the size of Apple.)
Sure there are some large cap companies that could benefit from reopening. Marriott International (NASDAQ: MAR) is a name that comes to mind. But the point is, the small-cap world is full of reopening stocks, while the mega-cap world is disproportionately low.
Banks can benefit from reopening
Finally, another industry that came down during the pandemic is finance, so I think it is Financial Select Sector SPDR ETF (NYSEMKT: XLF) could perform better if the world gradually returns to normal.
Banks were hit hard by the pandemic for two very good reasons:
- Although the banking business is complex, banks mainly make money by charging interest on loans. With an unprecedented low interest rate environment, bank profits were under pressure.
- The pandemic increases the risk of default, as unemployed borrowers can have problems paying their loans.
However, both may change as 2021 progresses. We are already starting to see interest rates ticking higher, and I expect more of the same as the pandemic ends gradually. And as unemployment begins to decline toward pre-pandemic levels, the risk of default faced by lenders is likely to diminish.
These are all great long-term choices no matter what happens in 2021
As a final thought, while I think all three have a good chance of beating the market in 2021, I’m not saying you should plan on holding them for a year and then cashing in. All three are excellent index funds that can create long-term wealth in your portfolio.