Top 5 funds I’m watching in 2021
2020 was quite a year for the stock market. Let’s talk about some funds which I will be watching with great interest in 2021. This list is generally arranged from most diversified -> least diversified and least risk -> most risk, but apart from the first entry on this list, the order is somewhat subjective and reflects my personal opinion. As with all articles on my blog, this article does not represent investment advice. I do not own most of these funds. See my 2020 in review article for the funds I actually hold in my portfolio. Do not invest in anything without doing your own research and due diligence.
1. Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
2020 total returns: +20.99%. Expense ratio: 0.04. Personally: VTSAX (and the Fidelity version, FSKAX) is one of my core investments as a passive investor.
Investing in VTSAX is as close as you can get to investing in the entire US stock market. It is the largest and probably the best total US stock market index fund. As the US stock market goes in 2021, so will this fund. It’s hard to argue with the low expense ratio, the diversification, the historical performance, and all of the other benefits of index investing. In the long run, very few actively managed funds will consistently beat a market index net of fees. Funds such as VTSAX serve as the benchmark by which all other investments returns are compared to. For a passive investor with a long time horizon, such as 30+ years, there is likely no better investment. I doubt that we’ll continue to see 20% returns in 2021, however.
2. Invesco QQQ ETF (QQQ)
2020 total returns: +48.60%. Expense ratio 0.20. Personally: As of December 2020, I do not own any shares in QQQ.
Invesco QQQ is an ETF that tracks the Nasdaq-100 index, which is the largest 100 companies on the Nasdaq exchange. The Nasdaq is a tech-heavy exchange, as some of the largest tech companies (such as Apple, Microsoft, Amazon, Facebook, Google, etc.) are listed on the Nasdaq. Because the tech sector has generally outperformed other market sectors in recent years, QQQ has done very well. In fact, QQQ has significantly outperformed the S&P 500 for 4 straight years since 2017, and has outperformed the S&P 500 in 9 out of the past 10 years. While history and common sense suggests that no single sector will outperform the market forever, in the current digital age, tech shows no signs of slowing down. Outperformance is not without risk, however, as QQQ is much less diversified than the S&P 500 or the total market, and in 2000, 2001, 2002, and 2008, QQQ suffered much greater losses than the overall market as well.
3. Fidelity Contrafund (FCNTX)
2020 total returns: +32.50%. Expense ratio 0.85. Personally: As of December 2020, I do not own any shares of FCNTX.
The first actively-managed fund and also the oldest fund on this list (inception in 1967). Fidelity Contrafund is a legendary actively-managed mutual fund famous for frequently outperforming the S&P 500. At risk of sounding like a broken record, in the long term, most actively managed mutual funds do not outperform the market, and in fact underperform the market net of fees. However, FCNTX’s track record shows that it’s not just some latest investment craze. As for downsides, it does have a relatively steep expense ratio at 0.85. Also, actively managed funds tend to have greater turnover than index funds (26% for FCNTX compared to 4% for VTSAX); fund turnover creates capital gains (or losses) which are taxable events. This is all to say that actively managed funds perform slightly worse than their returns on paper after expense ratio and tax efficiency are considered. All in all, FCNTX would have to outperform an index fund by about 1% to beat it. Finally, the fund is only as good as its management, which can change over time (the current manager has been at the helm for 30 years), and past performance does not guarantee future results. Still, FCNTX outperformed the market again in 2020, and for a fund that’s been around for longer than many of us have been alive, its track record is remarkable.
4. Ark Innovations ETF (ARKK)
2020 total returns: +157.73%. Expense ratio 0.75. Personally: As of December 2020, I do not own any shares of ARKK.
A relatively new and small ETF with world-beating performance and eye popping returns in 2020. ARKK has outperformed the market every year since inception in 2014, except in 2016, where VTSAX was up +12.66% but ARKK returned -2.00%. Again, it’s unlikely for any fund to outperform the market by the magnitude that ARKK has over the long run, but only time will tell when ARKK will come back to earth. In 2020, over 10% of ARKK’s holdings are in TSLA, which was up over 700%, contributing to its meteoric results. But unless TSLA’s stock price skyrockets by another 700% in 2021, or ARKK finds another company with such spectacular growth, I expect ARKK’s performance in 2021 to mellow out a bit. Ark Innovations has several other actively managed ETFs, such as ARKG and ARKQ, each targeting innovative or disruptive companies in a specific sector.
5. Renaissance IPO ETF (IPO)
2020 total returns: +111.05%. Expense ratio 0.60. Personally: As of December 2020, I do not own any shares of IPO.
Finally, yet another relatively new and small ETF with amazing returns this year. The Renaissance IPO ETF follows the Renaissance IPO index, which tracks companies that have recently completed an initial public offering (IPO). This includes companies such as Moderna, Uber, Zoom, Peloton, and Pinterest - I bet you’ve heard of most, if not all of these names in 2020. With some exceptions, newly public companies often have mixed performance, and many companies which go public for the first time are not actually profitable, relying instead on the promise of future growth, future profitability, or hype to justify their valuations. However, the fear of missing out on the next Amazon or Apple, combined with genuine excitement for new, innovative, or disruptive products or services, can result in spectacular IPO returns.
Bonus:
The next few entries are not funds, but I’m also keeping any eye on them in 2021:
Tesla (TSLA)
2020 total returns: +743.02%. Personally: I own a Tesla vehicle as well as a few shares of Tesla stock.
Tesla needs no introduction. Everyone knows Telsa by now. Why is Tesla worth almost $700 billion in market capitalization? Why did Tesla’s stock grow by 700% in 2020? Is it some combination of the company finally becoming profitable, lack of competitive EV rivals, Elon Musk’s cult of personality, tears of Tesla haters and naysayers, a 5 for 1 stock split in August, or inclusion in the S&P 500 in December? Or is it purely irrational? I don’t know. What I do know is that all traditional measures of a company’s valuation have gone out the window with Tesla. As of December 31, 2020, Tesla’s trailing twelve months (TTM) PE ratio is 1,349. This is about 36 times the PE ratio of the S&P 500 as a whole. My admittedly amateurish knowledge of fundamental analysis tells me that while Tesla is a great company, its stock is grossly overpriced by an order of magnitude. I expect Tesla’s stock price to plateau in 2021. But let’s check back in 2030, where I will be updating this blog from the surface of Mars in my autonomous Tesla Mars rover while connected to Earth via Starlink satellites.
Bitcoin (BTC-US)
2020 total returns: +303.16%. Personally: As of December 2020, I do not own any bitcoin.
Bitcoin also needs no introduction. It is the world’s pre-eminent cryptocurrency. Bitcoin ended 2020 at a price of $29,001.72 per bitcoin, compared to $7193.60 at the end of 2019. Much of this came from a sharp surge in prices starting around October. I have many (generally unfavorable) opinions about bitcoin as an investment. Briefly, unlike stocks or real estate, bitcoin does not represent a company or asset that generates profit or pay dividends. Therefore, bitcoin as an investment only provides a return if the price of bitcoin itself increases, and this price is arbitrary. There is a mathematical limit to how many bitcoins will ever exist; in this sense, bitcoin resembles a commodity such as gold, lumber or crude oil (which also don’t pay dividends). Commodities, however, derive their intrinsic value not just from limited supply, but also from their use and consumption for industry. Bitcoin is not consumed or destroyed in any economic process, so the demand for bitcoin is purely artificial. However, there are some legitimate arguments in favor of bitcoin if we stop judging its merits as a traditional investment. The one that I find most compelling is that it may instead become a fiat currency, much like the dollar itself, which also has no intrinsic value except for its backing by governments, financial institutions, and individuals.
Despite my personal opinions on bitcoin, there is no question that bitcoin far outperformed the stock markets in 2020. The numbers simply don’t lie. In addition, with institutional investors now investing in bitcoin, it is clear that bitcoin is here to stay, and is already receiving widespread acceptance as either an investment or a fiat currency.
Pershing Square Tontine Holdings (PSTH)
Offered at NAV of $20. 2020 end NAV: $27.72. Personally: I own a few shares of PSTH which I bought out of curiosity and to learn about SPACs.
PSTH is a Special Purpose Acquisition Company, or SPAC. SPACs are also known as “blank check” companies. While SPACs have been around for decades, they exploded in popularity in 2020 as an alternative method to an IPO for a company to go public. The SPAC itself is just a holding company that raises capital with the sole purpose of searching for and acquiring a privately owned company seeking to go public. The SPAC then merges with said company and takes the company public, with shareholders of the SPAC becoming shareholders of the newly public company.
There are many downsides to investing in SPACs, most notably that SPACs without an acquisition target are not real investments and the shareholder is buying a future company’s shares blindly. Therefore, SPACs are quite sensitive to hype, speculation, and intangibles such as the reputation of the SPAC manager. Additionally, should a SPAC fail to find a merger target within an allotted timeframe, the SPAC is dissolved and the shareholders are refunded. While this limits the downside, or potential losses, from investing in a SPAC, it also means that money can be tied up for several years with no results, leading to opportunity cost.
PSTH is notable for being organized by Bill Ackman, a famous billionaire investor and fund manager. It is also the largest SPAC in history having raised over $5 billion of capital. Therefore, there is plenty of speculation that PSTH can bring a highly desirable company public. Because of hype, despite having no acquisition target, PSTH shares are already trading at over 30% of NAV in December 2020. Many anticipate that PSTH will announce a merger target sometime in 2021.
As I continue with my core index fund investments, I am increasingly tempted to branch out into some non-index alternatives with a small amount of money, with the goal of beating the market and the acceptance that this is unlikely in the long run. Be sure to check back frequently for new articles and updates, and let’s look at this list again at the end of 2021. If you enjoy the content on my blog, please share and subscribe.
Happy investing!
