Should you replace stocks with bonds and funds? Are cryptocurrency investments worth the volatility? What are the dominant themes for investing in 2022?
Predicting the future can be a difficult exercise at any time. This can be especially the case in times of uncertainty, and there is no shortage of uncertainty heading into 2022. But a group of panelists said the adoption of exchange-traded funds (ETFs) and crypto- currency will continue to grow this year, during a roundtable on Jan. 4. , 2022, curated by Investopedia and ETFTrends.com.
Key points to remember
- Markets had an unexpected wild ride in 2021. For 2022, experts suggest a new approach and a move away from large-cap stocks.
- A risky environment should ensure that cryptocurrency adoption will continue in global markets.
- Panelists expect exchange-traded funds (ETFs) to continue to proliferate in 2022.
Their 2022 valuations come at a particularly unpredictable time in the markets. By the end of 2020, asset prices had soared and the S&P 500 had posted gains of more than 16% in a year in which the pandemic had crippled the US economy. Then investment strategists said prices were “stretched” and there was a “good possibility” of a pullback in 2021, reminding investors that “stock prices don’t go up forever.”
But stretched prices have not receded or fallen. Instead, the S&P 500 is up almost 27% in 2021. The coming year presents an even more confusing landscape. Inflation is on the rise. New variants of COVID have emerged. And the Federal Reserve is expected to raise interest rates in the coming year.
A fresh take
For 2022, panelists recommended a fresh look at markets. “To throw [out] your [portfolio] model. It makes no sense,” said Joshua Brown, founder of Ritholtz Wealth Management, an investment advisory firm. He noted that the past three years have been the best time for the stock market since 1999, despite the COVID disruption.
In 2022, large-cap growth stocks, which include stocks of top tech companies, will take a “pause” from major market gains, according to Brown. Instead, he urged investors to look to other places in the market that could promise profits, such as small-cap growth or small-cap value stocks.
Liz Young, head of investment strategy at millennial-focused personal finance firm Social Finance (SoFi), echoed Brown’s view. “In an environment of rising interest rates, other sectors [not tech] take the lead,” she explained, referring to an expected Federal Reserve monetary tightening expected in 2022. For younger investors who may have followed the herd into tech stocks, that means it’s maybe time to diversify their money into other sectors like healthcare The clean energy transition also offers several investment opportunities, Young said.
Panelists also identified other themes that should take center stage in the coming year. Cryptocurrencies are one of them. Stimulus money coupled with low interest rates drove investors’ cash into risky assets, such as cryptocurrencies, during the pandemic.
The market capitalization of cryptocurrencies reached over $1 trillion during this time. Decentralized finance (DeFi) and non-fungible tokens (NFTs) have become the latest buzzwords, and governments around the world are considering the introduction of central bank digital currencies (CBDCs).
According to SoFi’s Young, currency volatility will multiply in 2022 as central banks around the world chart their respective economic recoveries from the pandemic. The volatility will lead to greater adoption of cryptocurrencies across the global economy, Young said. In 2021, markets witnessed the launch of the first futures-based bitcoin ETF in the economy. This year, there will be many more thematic ETFs adjacent to bitcoin, according to Leah Wald, managing director of Valkyrie Investments.
Exchange-traded funds were another asset class that had a banner year in 2021. Dave Nadig, chief investment officer at ETFTrends.com, said four new ETFs were opened for every one that was closed. By the end of 2021, ETFs had received over $900 billion in inflows. “There’s a bit of manifest destiny here that the ETF is going to be a powerful wrapper for whatever kind of exposure the investor is trying to get,” Nadig said.
The thirst for ETFs as a vehicle to spread investments across different asset classes is reflected in the breadth of ETFs that cater to investors of all colors. Big investors, like Vanguard, have already hedged large-cap stocks with cash in their funds. This means that risky assets, like bitcoin, should gain favor with profit-seeking investment managers.
The Ark Transparency ETF (CTRU), which seeks to reflect the performance of the world’s 100 most transparent companies, is a “hot sauce” offered by the company to investors, said Eric Balchunas, senior ETF analyst at Bloomberg. He also identified ETF Avantis International Small Cap Val (AVDV) as another choice. However, a spot Bitcoin ETF, long considered the holy grail by crypto enthusiasts, will not be approved by the SEC this year, according to Nadig of ETFTrends.com.