Top ETFs for 2021

At the request of Legate DuckWheels, here is a list of my top ETF picks for 2021. ETFs are baskets of holdings designed to track a specific sector or index. These funds purchase shares, options, bonds, or even other ETFs. This allows the ETF investor to grab a diverse set of underlyings with one ticker. 

ETFs are the simplest way to build a diverse portfolio, or a portfolio set up with a specific goal, from dividend income to explosive growth potential. No matter what your particular goal, you will find an ETF for it.

Of course, the traditional SPY, VTI, and QQQ plays are always an easy choice. This list goes beyond the three kings and includes my favorites within different industries.

The Disruptor: Literally any ARK ETF, but especially ARKG and ARKK

For anyone who was paying attention in 2020, it should be no surprise that the ARK ETFs make the top of this list. Aunt Cathie Wood is Bae. Lisa Su is out. The 5 ARK ETFs have blown away competition and marched to higher highs throughout the year. ARK stands for Active Research Knowledge, a nod to its focus on groundbreaking innovators.

ARK ETFs focus on 4 areas, with the 5th being a mix of the other 4.

ARKG: Genomic Revolution. ARKG focuses on medical technology, particularly stem cells, CRISPR technology, and targeted therapeutics. Its largest holdings are Pacific Biosciences of California, CRISPR Therapeutics, and Twist Biosciences. This is my preferred ARK ETF pick, but LEAPS do not extend past one year. Therefore, shares is the play.

ARKF: Fintech Revolution. ARKF focuses on companies changing the way people make transactions, track finances, leverage blockchain technology, and fund investments. Largest holdings are Square, Mercadolibre (Argentina), and Zillow.

ARKQ: Autonomous Technology and Robotics. ARKQ focuses on autonomous transportation, 3D printing, space exploration, general robotics, and energy storage. Largest holdings are Tesla, Materialize NV (Belgium), and Trimble. 

ARKW: Next Generation Internet: ARKW focuses on internet telecommunications disruptors, specifically, E-commerce, cloud computing, cyber security, social media, and the Internet of Things. Largest holdings are Tesla, Roku, Square, and Teledoc Health.

ARKK: ARK Innovation. A grab bag of the other ARK ETFs. It strikes a balance between them, but appears to favor robotics with 9.9% of the fund in Tesla. Top holdings are Tesla, Roku, CRISPR Therapeutics, and Square. This is my second choice beyond ARKG. I believe ARKG will outperform ARKK, but ARKK offers more diversity and is therefore a safer choice.

Mikey's play: LEAPS on ARKK and shares of ARKG. ARKG does not offer LEAPS more than 12 months out, and so shares are more suitable. As of Xmas 2020, I own 1x ATM ARK LEAPS expiring in Jan 2023 in my taxable account. I intend to use my Roth deposit in January to buy shares of ARKG.

The Risks: ARKK and ARKQ are heavily invested in TSLA, which makes up about 10-12% of each. Although this was a deliberate choice that paid off, income-driven investors might be skittish about high-risk plays. These companies are disruptors and will likely do well. However, they will take heavy hits during a bear market. If you anticipate a selloff, ARK ETFs will likely suffer more broadly than the rest of the market. The management fees are higher at 0.75%, so annual gains will have a bite taken out.

The Semiconductor Techie: VanEck Vectors Semiconductor ETF (SMH)

SMH captures the semiconductor market and is suitable for investors who believe the next stage of computing technology will continue to lead the tech market. The largest holdings are Taiwan Semiconductor, Nvidia, Lam Research, and Applied Materials. AMD also makes the top 10. 

I believe semiconductors will continue to perform very well over the next several years. Many of the companies we are excited about, like AAPL and TSLA, need semiconductors during production. The 5G rollout will require more advanced semiconductors. SMH's holdings capture the industry very well, and I remain very bullish.

If you dislike SMH's holdings but are bullish on semiconductors overall, SOXX is an alternative ETF with different underlyings. Its top holdings are Qualcomm, Broadcom, and Texas Instruments. SOXL is a 3x leveraged semiconductor ETF.

Mikey's play: Holding 100x shares, may add more. Dividends are being reinvested into more shares with a Dividend Reinvestment Plan (DRIP).

The Risks: Semiconductors will preform well as long as there is demand for electronics, but this demand can dissipate quickly if the recession becomes severe. This ETF is relatively run-of-the-mill and semiconductors are deeply ingrained in tech, so there are no particular risks to it that do not affect the rest of the tech sector.

The Income Investor: SPHD or QYLD

Those who have larger accounts ($250,000+) are probably ready to start using a portion of their accounts to collect dividends. This is among the first steps toward using fixed income, and it is less time-consuming than using pure Theta plays. Let's face it- you are not going to iron condor your $1/4mil account every month. Putting some of your money into a dividend ETF allows you to focus your effort on a smaller number of other trades while still pulling income from your investments.

SPHD: Invesco S&P500 High Dividend, Low Volatility.  Holds the 50 highest-yielding and lowest-volatility stocks on the S&P500. The goal of the fund is to pay consistent and increasing dividends monthly. Its top holdings are Dow, Huntington Bancshares, and Lumen Technologies. Its dividend is roughly $0.15/monthly on a ~$37/share stock, or 5.01% annualized.

QYLD: Global X NASDAQ 100 Covered Call. Tracks a theoretical portfolio of NASDAQ stocks selling 30 DTE ATM covered calls on a rolling monthly basis. The top holdings are AAPL, MSFT, AMZN, and TSLA. The payout varies between $0.18-$0.24/share monthly on a $23 stock, so ~10-11% annually. QYLD is as close as you can get to a wheel index, but keep in mind covered calls are only one half of the wheel, and wheels underperform during a bull market.

Mikey's play: Holding 50 shares of SPHD and slowly building a position by investing premium from other theta plays into shares. This virtually guarantees a stream of income for life, however small. I do not hold shares of QYLD. However, I would like to begin building a position in it as well once I am satisfied with my SPHD holdings.

The Risks: Neither ETF is likely to outperform SPY unless the market is flat or down for the whole year. SPHD will not rise with the market because it invests in low-volatility stocks. QSLV sells covered calls on NASDAQ stocks, so it will miss out on large upside. In exchange, you get reliable monthly payments. Taxes will eat up your dividends, so these are best held in a non-taxable Roth account so that you can withdraw the full payouts without losing 15-20% to Uncle Sam in retirement.

The Ecologist: Invesco WilderHill Clean Energy (PBW)

PBW focuses on companies that are involved in the advancement of cleaner energy and conservation. It believes a societal shift toward better ecology will lead to growth in electric vehicles, clean energy, and environmentally-friendly business. Its largest holdings are FuelCell Energy (FCEL), Nio (NIO), Blink (BLNK) and Plug Power (PLUG). 

Investors who believe society's desire to fight environmental pollution and climate change will drive consumers toward ecologically-focused companies and those who believe a Biden/Democratic administration will reward the industry will benefit from holding PBW. Its 0.40% dividend won't turn any heads, but its 200%+ YTD return is very impressive from a growth perspective.

Mikey's Play: I do not hold any shares of PBW because I am fully invested in other sectors already. However, I would like to invest in PBW in the future and believe it is a good choice for this coming decade.

The Risks: Resistance to clean energy is abating. However, fossil fuels still power most of the US and society still depends on them. If enthusiasm for clean energy abates, PBW will follow because most of their holdings are small companies depending on expectations of increased revenue in the future. Also, if the Biden administration ends up less dovish toward clean energy than expected, with less subsidy to clean energy players, PBW's underlyings will likely drop.

The Sports and Esports Gambler: Roundhill Sports Betting & iGaming (BETZ)

BETZ focuses on online gambling, sports gambling, and gambling on Esports. It is not a pure bet on US companies. Most of BETZ is actually in companies outside of the US, with 50% in Europe. Ireland is a popular locale for online-only companies because of favorable tax status. Despite being a niche industry, it is geographically diverse. This is very valuable, because the US sports situation is still in flux due to COVID-19, and other countries may recover faster. There is also a data-processing element to BETZ as well, because gambling companies need to receive data from sports centers, online gaming, etc. Among its holdings is Kambi (KAMBI.ST - Sweden and Malta) that provides data to other companies, giving some protection from decreased consumer demand for betting directly.

Its largest holdings are Flutter Entertainment (FLTR.L - Ireland), William Hill (WMH.L - Ireland), and Pointsbet Holdings (PBH.AX - Australia). Its largest US holdings are the familiar names DraftKings (DKNG) and Penn National Gaming (PENN). 

There is a lot to be optimistic when it comes to gambling. Casinos might be taking a hit, but online gambling will pick up the slack and sports betting will return through online venues even if fans cannot make it to stadiums. There is also strong momentum in online gaming and Esports, which appears to have growing interest. I would not be surprised to see Esports become an extremely lucrative area, with e-athletes receiving great acclaim and drummed-up interest in competitions. There is no dividend, but BETZ is invested in a high-demand industry with explosive growth potential.

Mikey's Plays: This is not my preferred industry and so I do not have a position. However, I may take on LEAPS in 2021. I believe we have some time before BETZ takes off, but it is coming. Shares and LEAPS are a good play.

The Risks: Although COVID-19 vaccines are making their rounds, if the virus is more resistant than anticipated, then gambling will be more confined to the online space. This will help some companies in BETZ portfolio, but will damage others and stifle growth. Also, increased regulation to online gambling could damage the underlyings. Although Esports appear strong, there is no clear impetus that will launch that industry to new heights anytime soon, so that growth may not be imminent. The growth impetus may come in the next 24 months as the new generation of consoles starts producing better games.

The IPO and SPAC Investor: Defiance Next Gen SPAC Derived ETF (SPCX)

IPOs (Initial Public Offerings) struggled in Spring 2020 during the mad selloff. This makes sense because people taking their money out of established companies were unlikely to have any desire to throw it into a risky IPO. But as the economy started getting back to normal and the stock market's growth picked right back up, IPOs began booming again.

Among the other methods of going public included Special Purpose Acquisition Companies (SPACs) buying out a private company and assuming control of its operations. SPACs are designed specifically to have no operations of their own and raise money from investors with the sole purpose of buying another company. This allows that bought company to go public with less hassle than an IPO, and gives retail investors a chance to get into a stock before Big Money drives its price higher ahead of public trading.

SPACs have done very well in the latter half of 2020, and interest is piling on. Social Capital Hedosophia (SCH) with rockstar CEO Chamath Palihapitya at the helm is the hottest set of companies at the moment, trading as IPO(A-F). IPOA was the first SPAC to go public, acquiring Virgin Galactic and becoming SPCE. IPOB was next, copping OpenDoor, and IPOC is set to acquire a health company and become Clover Health. IPOD-F are still open and raising capital.

Naturally, people want SPAC and IPO exposure. You can buy the SPACs outright, but sometimes they just go fully into "pleas fly again" status. Another approach is to buy an ETF that captures many of them. SPCX offers this opportunity. Its top holdings are not yet available because it started trading last Weds, Dec 16 and so this information is not present yet. It is likely to choose SPACs that have not yet merged, judging by it's profile.

If you are not interested in SPACs but would prefer post-merger IPO companies, then SPAK or IPO are alternative plays. They focus on SPACs post-merger, unlike SPCX which appear to focus on pre-merger.

Mikey's Plays: Hold 30x shares of IPOD, may purchase shares or LEAPS on SPCX when holdings and strategy become available. Will avoid SPAK and IPO because I prefer pre-merger investments. 

The Risks: SPACs are a new investment vehicle. They have momentum, and 2020 saw about 3x as many SPAC-derived IPOs versus 2019. However, their track record is short, and if a SPAC does not find a company to buy after 2 years, it liquidates. This should presumably return a lot of the investment to shareholders, but will almost certainly come at a loss. You also run the risk of your SPAC buying a bad company, which is discussed here: https://www.reddit.com/r/SPACs/comments/hbhyi9/name_the_failures/. SPACs should be viewed with caution because they are high-risk/high-reward.

The Pothead: YOLO, MSOS, or THCX

The US presidential election going to Blue Team means we are likely to see marijuana decriminalization at the federal level and more legalization for recreational use at the state level. Now that we have some solid legalization prospects, cannabis stocks can finally break out of the rut they've been stuck in for years. 

Unfortunately, there is no way to know which cannabis companies will come out on top. Fortunately, we can invest in ETFs that capture the whole industry so we do not need to pick a winner.

YOLO: My preferred ETF. It holds companies in the US and Canada that already have revenue, some of which are already profitable even if we do not get legalization. If the US market takes off and leaves Canada behind, this ETF may underperform.

MSOS: A sister ETF to YOLO with a similar board. Unlike YOLO, MSOS focuses almost exclusively on US companies. This allows pure US exposure at the expense of potential buyouts and mergers on the Canadian side.

THCX: Focuses on both US and Canada, but with more Canadian exposure than the others. If you believe Canadian companies will get access to the US market and profit off the larger consumer base, this is the right ETF.

As an alternative, you can always buy MJ, which is mostly Canadian companies. This is a viable option if you believe Canada will dominate the US cannabis market or mergers will come in heavy. 

Mikey's Plays: I cannot buy these stocks on Merrill Edge because they are restricted. Therefore, I must buy them in Robinhood only. Long 17 shares of YOLO and 1x $8c on APHA expiring in April. I will likely buy LEAPS on YOLO when it becomes available on Merrill Edge.

The Risks: Cannabis has been on feast-and-famine cycles for years. Buying into marijuana companies is a bet that the US will finally make it commercially viable. If this does not happen, then cannabis plays get destroyed. This industry has also struggled in Canada, and there is no clear reason why the US would be any different.

Check out more about this in this post: https://www.patreon.com/posts/42912431

The Full-Power Bull: ProShares UltraPro QQQ (TQQQ)

The bull market has showed no signs of slowing down, and tech appears to want to continue to lead. If you should be that bullish, there are few reasons NOT to choose a triple-leveraged bullish ETF focused on the tech sector. Its top holdings match QQQ with AAPL, MSFT, AMZN, and TSLA.

TQQQ is the triple-leveraged version of QQQ. In bullish markets, TQQQ wins. If things are flat or down, TQQQ will suffer. In fact, in a prolonged bear market, triple-leveraged ETFs can get completely wiped and have to perform a reverse-split to stay solvent. Check the bearish triple-leveraged ETFs for evidence of this.

If tech keeps leading the market higher, TQQQ is the play. Each daily gain on QQQ will be multiplied 3x over, meaning TQQQ increases much faster and carries you much higher overall. 

Mikey's Plays: Holding 20x shares of TQQQ which have so far matched my 100 shares of QQQ in terms of percentage gain despite holding them for less than half the amount of time. I am torn between TQQQ and ARKG/K for my 2021 IRA deposit, but will likely grab at least a few more TQQQ.

The Risks: Leveraged ETFs are not designed to buy-and-hold. If the market gets slammed down or stays flat, then the fund does poorly to the point where it must reverse-split to recover share value. If the bull makret dissipates, TQQQ will underperform QQQ.  You must be prepared to move the money if market sentiment changes.

The Bear: ProShares Short S&P500 (SH)

If you are the one person who is still bearish, then take a pass at holding SH. SH is a short ETF, meaning its value increases as the S&P500 drops. It also has exposure to the bond market, which performs well in a struggling economy as people turn to safer places to store their money. Its top holdings are all bearish swaps and T-bills.

Although I poke fun at the bears, there are plenty of reasons to be bearish now. COVID-19 is still running rampant and has mutated to a more infectious strain. It is not clear for how long vaccines provide protection. The Fed printing money is going to eventually cause some headwinds. We have a change of leadership in the US. Brexit appears complete, finally, but the new trade deal could lead to economic challenges. And of course, we still have trust issues with China. Any one of these could start bringing the market back down, and there is always the risk of profit-taking sending us on a sustained downward path after so many years of explosive growth.

If you are a bear, I recommend SH over any leveraged bearish ETFs because in a bull market, leveraged bear plays get widdled-down to the point where they are no longer able to recover and must perform a reverse-split to stay solvent. Unless you believe you can time the bear market, which you cannot, then leveraged bear positions are only suitable once the market is already correcting. Until that point, use SH in order to sustain your solvency while awaiting the meltdown.

Mikey's Plays: I am still bullish, so I do not hold any bearish plays. However, I would buy SH shares if that were to change. In a very bearish market, I would hold SPXS, although that did not work out for me last time since I bought in late March.

The Risks: We are in a bull market. Although there are some headwinds, the bull has shown few signs of slowing down. Holding a bearish ETF means missing out on gains in the bull market while the bearish position decreases in value. You should only hold bearish positions when your conviction is strong, or with a small portion of your portfolio to act as a hedge.