Markets were frenetic in 2020, as evidenced by a host of data points—most pointedly, the CBOE VIX Index closed above a level of 20 for 218 consecutive days in 2020, more days than the last eight years combined.1 Despite intense volatility, markets rallied significantly: The S&P 500® Index notched 33 new all-time highs and global stocks also closed the year at record highs.2
The standard 60/40 portfolio of global stocks and bonds returned 13%, helped by a rally in risk assets and duration-induced bond price appreciation amid falling yields.3 This marks the portfolio’s fifth double-digit return in the last 10 years. In the ETF industry, strategies range from broad to niche, enabling them to harness some of the out-of-this-world dispersion we witnessed in 2020. Three-month sector dispersion was, on average, in the 81st percentile in 2020, even topping out in 99th percentile a few times.4 Against this backdrop, how did ETFs perform in 2020? Let’s explore by considering two key charts.
2020 ETF performance: Thrusters turned on In a year of chaotic up and down days, ETFs had their thrusters turned on like a rocket taking off into space. 114 ETFs finished 2020 with returns greater than 50% and 23 ETFs posted returns greater than 100%—both record figures. When viewed as a percentage of existing funds, the totals translate to 5% and 1% of funds, respectively—also record levels.
As shown below, we have never seen returns like this before. Notably, most of these funds are long-only, non-leveraged ETFs, as only two of the 23 with 100% annual returns are levered ETFs. In other words, 2020 was a stratospheric success.
While 2020 delivered the greatest number of funds with triple-digit returns, it was not the best year when viewed through a finer-tuned lens. After the volatility and large drawdown in March, some funds just didn’t recover. US value strategies, for example, finished the year with an average return of just 2%. Overall, average and median returns were below prior years, coming in at 7% and 10%, respectively—figures that rank 9th and 7th over the last 15 years.
2020 also set an unpleasant record: The worst-performing fund was a leveraged ETF that declined 97.4%, narrowly eclipsing the 96.8% loss from one fund in 2012. However, the overall distribution of returns is right-tailed with a positive skew of 1.02 and is extremely leptokurtic (9.59 kurtosis versus a baseline of 3.0), meaning it has wider or fatter tails, as shown below.
Thematic funds rocket to the outer rim The performance trends of 2020 are startling when juxtaposed against the unimaginable humanitarian suffering and loss. The contrast underscores the notion that the market is not the economy. It also highlights the idea that, if you are not “in the market,” then you are not able to fully benefit from the monetary and fiscal policies implemented during the crisis that have supported risk assets, such as stocks and credit. Overall, in 2020, with low rates and other accommodative policies supportive of liquidity and risk, TINA (There Is No Alternative) was at the helm.
That is the cynical viewpoint. It is not wrong, but there is more to the story. Some of the performance figures seen in 2020 are a result of the societal sea change that has supercharged transcendent trends, including e-commerce, clean energy, remote access, video conferencing, cybersecurity, and intelligent infrastructure—directly impacting the innovative firms within these industries that are facilitating an evolution of corporate and social behaviors. Strategies focused on these firms comprise a significant portion of the top-performing ETFs in 2020. In fact, thematic fund performance went to the outer rim of the galaxy in 2020. Based on our classification system, 20 of the 23 funds with greater than 100% returns are thematics, and 58 out of the 114 funds with returns above 50% are thematics.
The space race in 2021 and beyond Calendar year return analysis is imperfect, as the world does not change with the flip of a calendar. What was relevant on December 31 is still relevant on January 1. What has transpired over the last 10 months is likely to continue to be with us for some time through second and third derivative effects. A rebuild—hopefully right around the corner—will take time.
2020 didn’t produce the strongest returns for the ETF industry, but it did produce the largest percentage of funds with eye-popping 50% and 100% returns. Some of the funds that reached the upper stratosphere may continue to soar as the behavioral shifts which catalyzed their performance are unlikely to change. Technological innovation in particular will continue reshaping our way of life. It will touch every industry and be the spark for new ones, like remote work, telehealth, and e-learning. As shown in 2020, this inflection point may present opportunities that are not currently well represented in traditional market exposures.
My hope for 2021, among many humanitarian ones, is that when investors try to participate in this sea change, they favor specific thematic ETFs and avoid the “gamification” investing craze that has led many to load up on single stocks. Not all firms will innovate at the same pace or will be able to participate in the evolutionary change in the same manner. When targeting broad-based thematic trends where idiosyncratic or firm-specific risk can be elevated, a diversified, non-market-cap weighted investment approach may be optimal.
1Bloomberg Finance L.P. as of 12/31/2020 2Bloomberg Finance L.P. as of 12/31/2020 3Bloomberg Finance L.P. as of 12/31/2020, based on the return of the MSCI ACWI Index and the Bloomberg Barclays US Aggregate Bond Index 4Bloomberg Finance L.P. as of 12/31/2020
CBOE VIX Index: The Chicago Board Options Exchange (CBOE) Volatility Index shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.
S&P 500 Index: A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
The views expressed in this material are the views of Matthew Bartolini through the period ended January 12th, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal. Past performance is no guarantee of future results.
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