Following a topsy-turvy year for the stock market, fund managers must navigate further major challenges and opportunities in 2021. The global pandemic will continue to damage some industries while boosting others. And the economy that has struggled since the start of the pandemic will continue to depend on historically low interest rates and massive federal assistance—as well as COVID-19 preventive measures, vaccines and treatments—to regain strength.

Bottom Line Personal asked top fund picker Janet M. Brown which trends will determine the success of stock funds in the new year and which ­mutual funds and exchange-traded funds (ETFs) can help investors benefit from those trends…

6 Key Trends 

The big-tech love affair ­continues. The technology sector has gained 32.7% this year as of November 6, led by stocks ranging from Apple to­ ­PayPal and Zoom Video, versus an 8.6% gain for the S&P 500. Services such as
e-commerce, digital payments and online communications have become essential elements of everyday activities, helping to fuel the rise in tech stocks. 

Growth stocks outpace value stocks. Stocks of fast-growing companies have gained 25.8% this year, outperforming bargain-priced stocks of slower-growing companies, which have lost 10.7%. An uneven economic recovery has led investors to prize companies that can rapidly increase their revenue and earnings even in rough times. 

“Sustainable, responsible and ­impact” investing goes mainstream. The focus on companies that treat their employees and communities and the environment well has helped SRI stocks gain 15.3% this year with far less volatility than the S&P 500. Reason: Many of the SRI companies, including top tech firms, have consistent earnings growth and solid balance sheets.

Home construction and home improvement surge. An index tracking these stocks has gained 25.8% this year. Many catalysts remain in force, including near-record-low mortgage and home-equity loan rates and stepped-up spending on repairs and upgrades by homebound homeowners.

The US dollar weakens. Analysts expect the dollar to continue to drop against major foreign currencies because some foreign economies, especially in Asia, are recovering faster than the US economy, and the Federal Reserve expects to maintain near-zero interest rates for years. A weaker dollar means that your investments in foreign stocks are worth more once they are converted back to US currency. 

Alternative investments gain favor. With both stocks and bonds expensive and prone to heightened volatility, more investors are turning to other types of investments, such as convertible securities and stock options.

Most Attractive Funds

For aggressive investors: Funds that focus on narrow areas of the market could have the strongest prospects for gains, although they could be more volatile than the overall market.

Invesco S&P MidCap 400 Pure Growth ETF (RFG). Medium-size companies historically outperform the rest of the market in economic recoveries because they have more reliable cash flow and steadier balance sheets than small companies, but they are more nimble than big companies. This ETF selects about 100 companies in the S&P 400 MidCap Index based on factors such as growth in revenue and profits, then weights the fastest growers more heavily. Performance: 27.7% (one-year) and 10.4% (10-year).* 

iShares US Home Construction ETF (ITB) is a very concentrated ETF that tracks an index of 46 stocks ranging from the largest residential home builders in the US such as D.R. Horton and Lennar to home-improvement giants The Home Depot and Lowe’s—which should benefit from the resurgent housing industry. Performance: 26.1% (one-year) and 17% (10-year). 

Matthew Asia Innovators (MATFX) invests in 40 fast-growing companies in developed and emerging markets across Asia. Performance: 69.5% (one-year) and 13.6% (10-year). 

Fidelity Trend (FTRNX) invests in 115 stocks tapping into powerful long-term trends, including ones that benefit from pandemic-related changes in consumer behavior, such as the growth of e-commerce and the move from cash to digital payments. Performance: 49.6% (one-year) and 17.1% (10-year). 

For moderately aggressive investors: These funds range from SRI to foreign stocks and alternative investments. If you’re comfortable with long-term holdings that have about the same volatility as the broad market, consider these funds for the majority of your portfolio’s stock allocation.

Brown Advisory Sustainable Growth (BIAWX) invests in large- and mid-size companies that promote practices such as energy efficiency and worker wellness—not just for the good of the environment, employees and society but also to save money, enhance their brands and grow ­revenues. The fund recently held 33 stocks, with nearly 40% of its portfolio in technology. Performance: 43.2% (one-year) and 19.3% (annualized since 2012 ­inception). 

Fidelity Worldwide (FWWFX) invests in about 250 companies with above-average earnings growth and ­attractive valuations. The fund recently held 65% of its portfolio in US stocks and 35% in foreign stocks, mostly in Europe. Performance: 32.1% (one-year) and 11.9% (10-year). 

SPDR Bloomberg Barclays Convertible Securities ETF (CWB) holds 200 convertible corporate bonds, which are hybrid investments that have the defensive qualities of bonds, such as steady interest payments, but also give the fund the option of exchanging the bonds for a predetermined amount of the issuer’s stock in rising markets. Performance: 42.1% (one-year) and 11.2% (10-year). 

Amplify BlackSwan Growth & Treasury Core ETF (SWAN) holds two types of investments that generally move in opposite directions—US Treasuries, which tend to shine when the stock market is dropping, and S&P 500 stock options, which allow the fund to capture positive returns when stocks are rising and mutes losses in down markets. It’s a relatively new offering, launched in ­November 2018, but it may be attractive for risk-averse investors because it can produce decent returns in many types of market environments with limited volatility. Performance: 15.1% (one-year) and 15.6% (since inception). 

For conservative investors: These funds invest in a mix of stocks, bonds, cash and/or alternative investments.

Value Line Capital Appreciation (VALIX). Since 1952, this fund has used a proprietary “timeliness” ranking system to pick the most attractive stocks based on company earnings and financial strengths. It recently held about 80% of its portfolio in large- and mid-cap growth stocks with the rest in cash and bonds. Performance: 22.4% (one-year) and 10.8% (10-year). 

Pax Sustainable Allocation ­(PAXWX), launched in 1971, is among the oldest and best-performing SRI funds. It’s actually a global “fund of funds” that holds eight underlying Pax funds, all of which invest based on environmental, social and governance (ESG) criteria. The portfolio includes funds that focus on bonds, large- and small-cap US stocks, dividend-paying companies and companies with female CEOs. Over the past decade, the fund has been about 40% less volatile than the S&P 500. Performance: 14% (one-year) and 8% (10-year). 

*All year-to-date and one-year performance figures and 10-year annualized returns and returns since inception are from Morningstar Inc. and are through November 6, 2020.