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5 Themes That Are Significantly Outperforming The Market So Far In 2021

Growth and tech leadership has given way to a rotation into previously beaten down cyclical sectors.

While there has been some choppiness along the way, the equity markets are mostly picking up right where they left off in 2020 - posting additional gains and setting new all-time highs.

The composition of the rally, however, looks quite a bit different. Last year was dominated mostly by large-cap tech and growth stocks. This year, economic recovery plays are leading the markets higher.

The big narrative is still the global economic recovery. To date, most every piece of data suggests that a slow, steady rebound is taking place. Jobs data is still a little weak and there are markets around the world that are still lagging in their recovery efforts, but at a 30,000 foot view, things are progressing nicely.

Of course, there have been winners and losers, but here are some of the themes that have performed the best so far in 2021.

Small Cap Value

If there's one thing we'd been able to count on for the past 12 years prior to 2021, it's that small-cap value would be one of the market's biggest underperforming groups. Of the 9 major styles boxes (large-, mid- and small-cap; growth, blend, value), it was easily the bottom of the barrel.

Not this year. The post-COVID recovery has put small-caps, value stocks and cyclicals back in investors' good graces for the first time in what feels like forever. Small-caps are easily outpacing large-caps and it's the value sub-group that's pulling the entire sector higher.

Small Cap Value vs. Small Cap Growth

Small Cap Value vs. Small Cap Growth

It's not even by a small margin either. Small-cap value is beating small-cap growth by a staggering 17% year-to-date, most of that coming since the 2nd half of February.

With such underperformance for so long, I feel there's still a lot of catching up to do in this group. As long as the economic recovery remains intact and the Fed or inflation doesn't throw a wrench into things, there could be further gains ahead.

Fossil Fuel Energy

The energy sector has rebounded in a big way in 2021 thanks to the COVID recovery and anticipation that the energy demand will soar once the economy fully reopens and people begin traveling, vacationing and resuming normal activities.

But it's not the entire energy sector that's gaining. Last year, clean energy dominated the landscape as then-candidate Biden talked about making major investments into infrastructure and clean energy once elected. That sent clean energy ETFs to triple-digit gains in 2020, but this year has been a complete reversal.

Oil Stocks vs. Clean Energy Stocks

Oil Stocks vs. Clean Energy Stocks

Clean energy has been in the red this year, while oil producers, explorers and servicers are up more than 50%. There are a couple of immediate headwinds, however. Oil prices are already nearing $70 a barrel, which feels fully valued considering there's still work to be done in the recovery. Second, OPEC next month is planning on lifting some of its production cut agreement and that could send oil prices heading south again.

Like small-cap value, the beaten-down nature of oil stocks could mean there's a lot of ground to make up from the past decade and cyclicals look like a good bet for the remainder of 2021.

High Beta

If small-caps and cyclicals are currently leading the market higher, it stands to reason that high beta stocks, as a whole, are as well. That's exactly what we've seen this year and the disparity has been huge.

High Beta Stocks vs. Low Volatility Stocks

High Beta Stocks vs. Low Volatility Stocks

With this trend, it's also notable how investors are abandoning low volatility stocks as well. The ETF industry is on pace for another year of record inflows, but investors have pulled billions out of low volatility ETFs.

High beta, on the other hand, has been in great demand. Its outperformed low vol by more than 25% this year. High beta has done well as much for its composition as much as its risk. Not to be confused simply with growth stocks, high beta looks for more volatile stocks. Energy and financials comprise nearly half of the portfolio right now, so you can see why it's performed so well this year.

Women in Leadership

With March being Women's History Month, why not highlight how well a portfolio of women-led businesses has performed this year? The SPDR SSGA Gender Diversity Index ETF (SHE) provides "exposure to U.S. companies that demonstrate greater gender diversity within senior leadership than other firms in their sector." It's not necessarily a portfolio of women-founded companies, but the better than average presence of women in leadership roles makes SHE an intriguing investment option.

SHE ETF

SHE ETF

Year-to-date, SHE is outperforming the S&P 500 by more than 2% and is beating the index by nearly 6% over the past year. There's also the Impact Shares YWCA Women's Empowerment ETF (WOMN) that offers "exposure to companies with strong policies and practices in support of women’s empowerment and gender equality." It trails the S&P 500 slightly in 2021, but is ahead by a solid 13% over the past one year. If you need an extra incentive, Impact Shares is a 501(c)(3) non-profit organization that donates all net advisory profits from WOMN’s management fee to the YWCA.

Leisure & Entertainment

This shouldn't at all come as a surprise since it's almost a pure economic recovery play. The leisure industry, which consists of airlines, hotels and travel destinations, was eviscerated last year as the tourism industry ground to a virtual halt, but optimism that things will return to normal at some point this year has investors piling back in.

PEJ ETF

PEJ ETF

This sector is actually trading above pre-pandemic levels, so there's some question of whether or not there's any value here, but momentum is squarely in this sector's favor.

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