Now that it's all said and done, 2020 was an objectively good year for stocks — one in which the S&P 500 returned a robust 18%.
But getting there was a rough ride. The benchmark index dipped nearly 34% between February 19 and March 23 as the full ramifications of the Covid-19 pandemic began to take hold. From there, the stocks staged an impressive, albeit volatile comeback, closing out the shortest-ever bear market. Prices fluctuated dramatically for much of the year, reflecting widespread investor uncertainty surrounding the presidential election and measures being taken to end the pandemic.
Even though the broad stock market touched new highs to end the year, its rising tide didn't lift all boats. With large swaths of the economy either fully or partially shuttered due to Covid-19 restrictions, many businesses struggled to stay afloat in 2020.
Some stocks have not only survived but thrived under pandemic conditions, either benefiting from the ways in which the pandemic has shaped how people live, or continuing a track record of profitability or innovation that investors saw lasting long after the coronavirus subsides.
The list of top finishers includes some stocks you may have never heard of and leaves out some you'd expect to make it. Despite a huge spike in online retail sales, Amazon finished 2020 in 92nd place, for example. And although 2020 was a banner year for streaming, Netflix finished 111th.
The Grow team used FactSet data to find the 10 stocks in the Russell 1000 — an index tracking the 1,000 largest companies in the U.S. stock market — that posted the highest returns in 2020.
Dive into the list and trends quickly begin to emerge. In a brutal year that saw energy firms in the S&P 500 surrender nearly 33%, alternative energy darlings Tesla and Enphase Energy (which designs solar energy systems for residences) led the pack.
Nor does it take much digging to figure out why biopharmaceutical firm Moderna (which manufactured one of the Covid-19 vaccines currently in distribution), videoconferencing provider Zoom, and cloud computing firm Fastly (which counts TikTok parent company ByteDance as its largest customer) enjoyed an excellent 2020.
In fact, most of the companies on the list are ones that investors see benefiting from a long-term shift in people conducting more of their lives from home, online: Exercising from home (with, say, a Peloton bike), working or learning from home (often using Zoom), or shopping from your couch (say, via Etsy, which enjoyed an explosion in sales this year thanks in part to demand for handmade fabric masks). Investors have responded to these trends by boosting shares in cloud-computing firms, among them Cloudflare and Zscaler, which provide cloud-based cybersecurity solutions.
If you're interested in buying into stocks benefiting from cutting-edge trends in the market, you'd be tempted to buy last year's big winners, hoping that they'll continue to run. But buying into any one stock is a risky proposition, especially if it has recently enjoyed eye-popping results. For one thing, as you'll read in the fine print of every investment vehicle out there, past investment performance is not indicative of future results.
"Just because something performed well in 2020 doesn't mean that it will continue to perform well in 2021," says Todd Rosenbluth, director of ETF and mutual fund research at CFRA.
When a stock experiences a huge surge in share price, investors may begin to feel that it's overvalued and trading at too high a premium to its peers and to the rest of the market. Analysts at JPMorgan, for instance, recently lowered their expectations for shares of Zoom and Cloudflare, citing the companies' sky-high valuations.
And even a stock that's risen prodigiously may fall on negative news. Although Fastly has benefited tremendously from the rise of TikTok, analysts at investment firm Piper Sandler recently recommended selling the shares on the news that TikTok is looking to develop an in-house version of the type of software Fastly provides.
If you're interested in buying market innovators, experts from Warren Buffett on down recommend taking a diversified approach through a low-cost mutual fund or exchange-traded fund, thereby mitigating the risk that any one particular stock takes a dive.
One approach that worked for investors this year: owning the Nasdaq 100. This index, which tracks stocks issued by the 100 largest nonfinancial companies listed on the tech-heavy Nasdaq stock exchange, is chock-full of fast-growing, innovative firms. While investing in the index in 2020 wouldn't have netted you nearly the same gains as a straight bet on Tesla, you'd have still pocketed a not-too-shabby 49% return. Investors looking for exposure to the index can own it through the Invesco NASDAQ 100 ETF (QQQM), which charges an expense ratio of just 0.15%.
If you're looking to target a particular trend, such as cybersecurity, online retail, or working from home, there's probably an ETF for that. To find funds that contain a particular firm you're interested in, you can search for the stock on ETF.com to find a list of ETFs that hold large allocations to the name. You may also be able to do this through your brokerage website's ETF screener.
But before buying any thematic ETF, be sure to look under the hood, says Rosenbluth. "ETFs are fully transparent and in many cases index-based, so what's in it now is likely to be in there throughout 2021," he says. "The benefit of transparency is that you can see what companies are part of the portfolio."
If you're interested in cloud computing, for instance, you have plenty of funds to choose from. The Global X Cloud Computing ETF (CLOU) invests in cloud computing firms of all sizes and charges an expense ratio of 0.68%. The fund counts Zscaler and Fastly among its top-five holdings.
A competing cloud ETF, First Trust Cloud Computing ETF (SKYY), comes a little cheaper, with an expense ratio of 0.60%, and tilts more toward megasize firms, with Microsoft, Amazon.com, and Alphabet (all of which are major cloud companies, but with other prominent business lines) as top 10 holdings. For funds like this, it's worth considering whether the portfolio provides too much overlap with your core, diversified holdings, says Rosenbluth.
"Thematic ETFs can be a complement to a broad asset allocation strategy," he says. "But if you're getting similar exposure as you would with a broader ETF, but paying a premium fee, it may not be worth it. You can get a tech sector ETF at 0.13%. Should you pay a higher expense ratio if you already own Microsoft, Amazon, and other megacaps? It's certainly worth considering."