If investors entered 2020 unsure of their convictions, they know them now. The unprecedented uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic upended society and sent the benchmark S&P 500 into an absolute tailspin during the first quarter. Although the broader market has recovered and gone on to hit new all-time highs, volatility remains well above its average in recent years.
For investors who aren't used to dealing with violent swings in the stock market, it can be a bit unnerving. The good news is that there's a way to remain invested while mitigating this volatility risk. I'm talking about buying exchange-traded funds, or ETFs.
An ETF is a security that holds a basket of investments and has a well-defined focus. Investors can buy ETFs that target growth or value, stocks with market caps ranging from small to large, specific industries or sectors, and even particular countries or regions. If you can dream it, chances are there's an ETF for it.
If you want to mitigate your risk but still walk away with more money in 2021, the following three ETFs are no-brainer buys.
First Trust Nasdaq Cybersecurity ETF
There's no shortage of double-digit growth opportunities this decade, but the surest bet might be cybersecurity. Businesses were already moving online and into the cloud well before the COVID-19 pandemic. Coronavirus chaos has simply accelerated this move, increasing demand for network and cloud protection.
Cybersecurity isn't optional anymore. Hackers and robots don't take days off just because the U.S. or global economy is struggling. This means cybersecurity revenue is highly predictable and often transparent, thanks to subscriptions.
As of this past weekend, the First Trust Nasdaq Cybersecurity ETF had 40 holdings (excluding cash), with a median market cap of roughly $7.7 billion. Two of my favorite cybersecurity stocks can be found within its top 10: CrowdStrike Holdings (CRWD 6.97%) and Palo Alto Networks, the ETF's respective No. 1 and No. 8 holdings by percent of assets.
CrowdStrike (7.67% of assets) is a favorite with cybersecurity enthusiasts because its Falcon platform is built entirely within the cloud. Using artificial intelligence, Falcon oversees and assesses more than 3 trillion events each week. Being cloud-native, CrowdStrike's platform is much faster at identifying threats than on-premises security solutions. It's also usually cheaper.
Cybersecurity stocks aren't fundamentally cheap, but they look to have surefire growth potential, year in and year out. That makes the First Trust Nasdaq Cybersecurity ETF a smart buy in 2021.
iShares Mortgage Real Estate ETF
Now for something truly off the wall: the iShares Mortgage Real Estate ETF (REM 1.25%).
Mortgage real estate investment trusts (REITs) may sound intimidating, but their operating model is actually pretty simple. These businesses borrow money at short-term lending rates and acquire assets that have a higher long-term yield. For mortgage REITs, we're usually talking about mortgage-backed securities (MBSs). The difference between the yield from MBSs and the short-term borrowing rate is known as the net interest margin (NIM). The wider the NIM, the more money mortgage REITs make.
Furthermore, since REITs avoid the normal corporate income tax rate in exchange for paying out most of their profit in a dividend, they often have market-trouncing yields. The iShares Mortgage Real Estate ETF had a trailing-12-month yield of 7.73%, as of Dec. 31, 2020. Even accounting for its 0.48% net expense ratio, you could double your initial investment in a decade on this yield alone with reinvestment.
Another interesting difference between mortgage REITs is their choice to hold agency or non-agency assets. Agency assets are protected in the event of default by the federal government, while non-agency assets aren't. Not surprisingly, non-agency assets have higher yields, along with more inherent risk. The iShares Mortgage Real Estate ETF allows investors to blend these different mortgage REIT focuses.
Finally, it's not uncommon to see the yield curve steepen during the early stages of an economic recovery. A steepening curve should widen realized NIMs and result in an expansion of book value and possibly even payouts. This is the perfect time to invest in mortgage REITs and the iShares Mortgage Real Estate ETF.
ProShares Pet Care ETF
Another way investors can put more money in their pockets in 2021 is by investing in one of the most powerful trends over the past quarter of a century: companion animals.
According to the American Pet Products Association (APPA), the percentage of households owning a pet has grown from 56% in 1988 to 67% of households in 2019-2020. That works out to 84.9 million households with at least one companion animal today.
Based on estimates and actual data from the APPA, we haven't seen a year-over-year decline in U.S. pet expenditures in at least a quarter of a century. Spending in 2020 was estimated to have hit $99 billion, with a little over $30 billion spent on veterinary care and $38.4 billion allocated for food and treats. Pets are increasingly viewed as members of the family, and people are willing to spend big bucks to ensure the well-being of their four-legged companions.
That's why the ProShares Pet Care ETF (PAWZ 2.17%) is a no-brainer ETF to buy. The ProShares Pet Care ETF has a reasonably low net expense ratio of 0.5% and gives investors access to 25 top pet-focused and ancillary businesses. There are tried-and-true drug developers in the mix, such as Zoetis and Merck, as well as high-growth industry disruptors, like Trupanion for companion animal health insurance or Freshpet for organic and natural foods.
Pet owners have continued to spend more for nearly three decades, no matter what the economy was doing. That makes the ProShares Pet Care ETF a smart bet, especially in a recovering economy.