A small-cap ETF has surged over 30% in 2021, handily beating the S&P 500. Can it do it again in 2022?

Happy holidays! It is the eve before Christmas Eve. It is an abbreviated week, with markets closed Friday in observance of the holiday. Next week’s also a holiday but Wall Street isn’t taking a break for accounting reasons.

We’ll take a quick look back at some calls and predictions from 2021 that were good or bad, hopefully gleaning some insights about what that means for 2022, as omicron fears fade but inflation and fiscal and monetary policy remain key concerns.

As per usual, send tips, or feedback, and find me on Twitter at @mdecambre or LinkedIn, to tell me what we need to cover, or share your 2022 outlooks for the industry. We’ll try to post a few of those as we get them.

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The good
Top 5 gainers of the past week

%Performance

ETFMG Prime Junior Silver Miners ETF
SILJ,
+0.79%
7.3

Global X Silver Miners ETF
SIL,
+0.95%
5.8

SPDR S&P Metals Mining ETF
XME,
+0.14%
5.0

U.S. Global Jets ETF JETS

4.2

ARK Genomic Revolution ETF ARKG

4.1

Source: FactSet, through Wednesday, Dec. 22, excluding ETNs and leveraged productsIncludes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater

…and the bad
Top 5 decliners of the past week

%Performance

abrdn Bloomberg All Commodity Strategy K-1 Free ETF
BCD,
-0.26%
-16.0

Invesco Optimum Yield Diversified Commodity Strategy No. K-1 ETF
PDBC,
+0.50%
-10.5

VanEck Rare Earth/Strategic Metals ETF
REMX,
+0.49%
-8.5

Nuveen ESG Small-Cap ETF
NUSC,
+0.70%
-6.7

Vanguard International Dividend Appreciation ETF
VIGI,
+0.37%
-6.5

Source: FactSet

ETF crystal balls?

Portfolio strategist Astoria Advisors made some 2021 predictions, as a part of its annual call for the coming year. We thought it would make sense to review some of those themes, while looking for potential insights into 2022.

We caught up briefly with John Davi, who heads up Astoria. He said that many of the themes from 2021 will resonate in 2022.

“We think these themes will hold up for one to two more quarters and don’t think omicron will derail the recovery,” he told ETF Wrap. We’ll aim to chat more with Davi next week when we discuss his 2022 picks in earnest.

Dr. Copper?

A top area mentioned by Astoria was commodities, which had a terrible this week. The sector has been hit or miss on the year, depending on the fund. AA’s call of Global X Copper Miners ETF
COPX,
+0.91%
turned out to be solid, up 20.7% on the year, so far. Its run likely has been underpinned by the reopening of global economies, a fitful process with coronavirus variants sometimes wreaking havoc on sentiment.

However, it would seem logical to assume that 2022 also could be a strong one for select commodities, even as supply-chain bottlenecks that were very much a feature of 2021, loosen next year. Global X Copper carries an expense ratio of 0.65%, which translates to $6.50 of costs annually for every $1,000 invested. There are other copper funds, but COPX offers exposures to equity linked to the industrial metal, rather than futures for copper.

As an aside, rare-earth ETF, VanEck Rare Earth/Strategic Metals ETF has been volatile but a big performer for the year, up over 60% in the year to date, if investors are considering a fund that offers exposures to metals used in making tech components and powering electric vehicles. For that matter, Global X’s Lithium Battery Tech ETF
LIT,
+0.93%
also has been a solid gainer in 2021, up nearly 35%.

To be sure, past performance is no guarantee of future results and there is a sense that the transition from internal combustion engines to EVs could be a hitchy one.

What’s up, Doc?

So back to Astoria’s other 2021 picks, which included healthcare—a solid bet in the year considering the pandemic and the fervor around cures and vaccines. That said, Astoria’s call to gain exposure to that segment via ARK Genomic Revolution ETF
ARKG,
-0.33%
didn’t pan out, falling 32% on the year.

Cathie Wood is the CEO of ARK Invest, which operates the fund provider and focuses on a suite of “disruptive” innovation technology ETFs, including ARKG. Wood might say that investors need to maintain a much longer time horizon for her ETFs, which have all been underperforming compared with the Dow Jones Industrial Average
DJIA,
+0.55%,
the S&P 500 index
SPX,
+0.62%
and the Nasdaq Composite Index
COMP,
+0.85%.

Were there better healthcare bets? Sure.

Health Care Select Sector SPDR Fund
XLV,
+0.41%
has gained more than 22% thus far in 2021 and iShares Global Healthcare ETF
IXJ,
+0.29%
is up nearly 17%, carrying an expense ratio of 0.12% and 0.43%, respectively, compared with 0.75% for ARKG. All three are underperforming the broad-based S&P 500, which is up more than 25%, at last check Thursday.

That said, ARKG was up 178% in 2020, compared with returns of 11% for XLV and IXJ.

The cyclicals

A bet on cyclical growth, via the Industrial Select Sector SPDR Fund
XLI,
+1.18%,
would have generated a roughly 17% return. That’s about in line with the smaller Vanguard Industrials ETF
VIS,
+1.16%
which carries a slightly smaller expense of 0.10%, compared with XLI’s 0.12%. Wagering on industrial growth in 2022, should one choose to do so, is as much a wager on the economic expansion amid COVID and on how President Biden’s infrastructure initiatives take shape.

Punching above their weight

Astoria’s small-capitalization pick in 2021 was a stellar one, with the WisdomTree U.S. SmallCap Fund
EES,
+0.84%
surging over 31% on the year so far. The WisdomTree ETF has an expense ratio of 0.38% and offers exposure to the segment by “selecting and weighting stocks based on positive earnings over their most recent four quarters.” Astoria may have highlighted it because it provides what some investors would describe as “quality” companies.

WisdomTree’s fund outperformed the iShares Russell 2000 ETF
IWM,
+0.80%,
which is up 13% on the year with a 0.19% expense and iShares Core S&P Small Cap ETF
IJR,
+0.54%,
which rose 23% with a 0.06% expense.

The future is uncertain, but there are strategists who see large-cap valuations as a reason to continue to focus on smaller-cap companies. Both EES and IJR indicate that choosing quality names may lead to better outcomes.

Trouble in China

On the other side of the ledger, Astoria ID’d China as a big theme—and it was. The only problem was that it wasn’t a good theme for investors. Astoria’s featured iShares MSCI China ETF, 0.06% expense and $72 billion in assets, was down 23% in the year to date. That said, things could have been worse. KraneShares CSI China Internet ETF
KWEB,
-1.04%,
the heart of the regulatory storm in the region, tumbled 50% year to date and carried a 0.76% expense ratio.

It is impossible to know how the world’s second-largest economy will progress from a growth standpoint. But most strategist say that ignoring China in one’s portfolio (and international stocks broadly) can come at the peril of missing out on big upside that could hedge against weakness at home. KWEB posted a 58% return in 2020 and MCHI rose by over 26%.

Some 2022 predictions?

We spoke about the outlook for 2022 to the folks at Blue Tractor Group, who are behind the concept of a semitransparent fund that they refer to as Shielded Alpha. In other words, they run actively managed ETFs that provide the components of the fund, but not the specific weightings. Here’s what was said about next year:

The Fed tapering and signaling that rates will start going up in 2022 means that the markets are in for some volatility and potential down movement. Active ETFs are therefore ideally positioned to capture alpha in these markets vs. their passive brethren. 

The Federal Reserve is expected to ratchet up the pace of removing accommodation. Projections from members of the central bank also point to at least three interest rate increases in 2022, from a range between 0% and 0.25%.

Blue Tractor added:

We also expect continued growth in an important subset of active management – namely, the semitransparent ETF market that uses technology like ours. These products are perfect for issuers concerned that their proprietary portfolio strategies and trading are too exposed in the traditional fully transparent ETF wrapper.

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