2020 could be another banner year for exchange-traded funds.
The ETF industry is ending 2019 on a high note, with assets under management climbing to more than $4 trillion and nearly $290 billion flowing into ETFs year to date, on pace to top 2018's inflows, according to data compiled by ETF.com.
Industry leaders and professional ETF market researchers have told CNBC's "ETF Edge" this month that the strength is likely to continue in the new year.
Here's what could be in store for the ETF market in 2020.
Best ETFs for 2020
Marijuana, gold, oil, emerging markets and micro caps are just some of the investing themes industry pros expect to work in the year ahead.
Cannabis craze
"I think this is going to be a big year for cannabis ETFs," said Dave Nadig, managing director of ETF.com. "It's been a rough year for most of the cannabis investments, and I think that in 2020, we're going to see a continued push towards legalization around the world."
The ETFMG Alternative Harvest ETF (MJ), the market's largest cannabis ETF in terms of assets under management, has shed nearly 31% in value year to date as many of its underlying securities went through an industrywide reckoning related to longer-than-anticipated product rollouts and overly enthusiastic forward estimates. Rival marijuana ETFs launched earlier this year have shared in the pain.
"The companies that are in these funds right now, I think, are going to get overpriced very quickly and we're going to see a lot more companies come to play," Nadig said.
Tim Seymour, who is founder and chief investment officer of Seymour Asset Management and runs the Amplify Seymour Cannabis ETF (CNBS), advised investors to take their time if they're considering buying into the downtrodden group.
"As a guy who runs a cannabis ETF … my view is that the size of the addressable market has grown," Seymour said shortly after returning from the MJBizCon cannabis business conference in Las Vegas.
"You're starting to see separation of the performers and the nonperformers. You're starting to see capital markets dynamics come to work," Seymour said. "So, there's no question about the efficacy [or] what's happening in the sector. The question is are these companies, right now, you can invest in?"
Crude comeback
If you're looking to put your money to work now, Seymour suggested a contrarian play he expects to break out in 2020: the VanEck Vectors Oil Services ETF (OIH).
"Think about the underperformance we've had" in the OIH relative to the S&P 500, he said. The OIH, which Seymour noted holds high-quality companies like Schlumberger and Halliburton, is down nearly 5.5% for the year while the S&P is up more than 27%.
"Offshore rig counts are actually improving. I think we're starting to see a recovery," Seymour said. "We're seeing offshore spending on oil, and upstream is starting to improve. ... It's not just [the] Saudi Aramco IPO, but I think you've started to see some work-through of base oil prices. I think it's a place where the companies are finally making money again."
Emerging gains
Seymour's final breakout pick was the iShares MSCI Emerging Markets ETF (EEM). With roughly 40% of its portfolio in Chinese stocks, the EEM could be a top beneficiary from a resolution to the U.S.-China trade dispute, he said.
"It comes down to having some opportunity," the investor said, adding that he thinks emerging market companies' earnings per share will outpace those of developed market companies by 5% or 6% in the year ahead.
"In 2019, the renminbi was a major, major headwind, but 45% of Asia's GDP is pegged to the renminbi," Seymour said. "I think, especially in a world where we get a trade deal, [the] dollar weakens a bit [and] takes a lot of pressure off of the Asian currencies. And EEM, if you think about the top weights in there, you've got Samsung, you've got Tencent, you've got Alibaba. Alibaba is breaking out over a multiyear range and I think the fundamentals are very strong there."
John Davi, founder and chief investment officer of Astoria Portfolio Advisors, shared in the emerging-market bullishness.
"We like EEM," Davi said. "If you think about what's hurt emerging markets, it's been a stronger dollar, ... it's been Fed hiking rates last year, so, a lot of those catalysts have subdued."
Moreover, EEM has underperformed other major stock baskets in the last year, Davi said. On a one-year basis, EEM is up less than 16% versus the euro zone-focused iShares MSCI EAFE ETF (EFA)'s 20% gain and the S&P's 33% run.
"I think there's a catch-up trade there," Davi said. "It's cheaper than EFA, cheaper than the U.S., so, you've got some of these catalysts out of the way, you've got a resolution with the U.S. and China trade war, [the] Fed's on hold, so, I like EM a lot."
Resolving the U.S.-China trade war could have an outsized effect on the Chinese market itself, KraneShares Chief Investment Officer Brendan Ahern said.
His choice for a possible 2020 breakout was his firm's MSCI All China Index ETF (KALL), which has notched a nearly 27% gain this year and holds stocks like Alibaba and Tencent.
"Much as John just articulated, I like EM. But the problem with broad-based EM is it's all old sectors, all old economy," Ahern said. "It's 50% value. That's why I think broad-based EM has lagged the S&P 500 for the last decade. We're in a growth market and the broad-based EM is a value play, so break out the growth part. That's our view for next year."
Going for gold
Will Rhind, founder and CEO of ETF issuer GraniteShares, pointed out that "if we get a correction or something happens to the market, people look for defensive names."
In a presidential election year with critical issues like U.S.-China trade still on the table, investors could brace for impact by buying into gold, Rhind said. His firm runs the GraniteShares Gold Trust (BAR).
"Something like gold, I think, will come back in a big way. There's obviously been a lot of interest in that, but right now, with the market still doing well, people are still focused on pro-cyclical, market-based strategies," Rhind said. "I think that if there is a pullback, some correction, you could get gold coming back."
Quality over quantity
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, said he expected the iShares Edge MSCI USA Quality Factor ETF (QUAL) to break out in 2020.
While Rosenbluth acknowledged that quality is ultimately "in the eye of the beholder," he said QUAL's methodology — owning "blue-chip companies" with high growth metrics, low volatility profiles, "strong balance sheets [and] strong earnings trends" — has proven out this year.
"Among these are large-cap companies like Apple … Johnson & Johnson. These are strong companies that ... if the earnings trends tend to be more moderate, but positive, [and] the economic trends are positive, this is a good way of going," Rosenbluth said. "It's beating the S&P 500 this year and is likely to do well again in 2020."
Microscopic focus
Kim Arthur, founding partner and CEO of Main Management, said investors searching for big 2020 gains may have to look small.
His pick for a 2020 breakout ETF was iShares' Micro-Cap ETF (IWC), which holds an assortment of relatively tiny public companies and trades at roughly the same price-to-earnings valuation as the EEM.
In particular, Arthur's bull case for the IWC was tied to the level of the widely watched purchasing managers' index, or PMI, which tracks the health of the manufacturing sector.
"When you have a move up in the PMIs above 50, people love micro cap," Arthur said in the Monday "ETF Edge" interview, noting that the micro caps — which include stocks like Axsome Therapeutics and Onto Innovation — share characteristics with other key portions of the market.
"What happens when the global manufacturing PMIs move from below 50 to above, which is the direction they're going right now, you want to be long size, small cap, micro cap, you want to be long international and you want to be long value," Arthur said.
Paving the way
Jay Jacobs, Global X ETFs' head of research and strategy, picked one of his firm's products as a top breakout candidate for 2020.
"This was a year [with] very little earnings, and so what moved the markets was sentiment and policy, mostly the trade war. Heading into 2020, I think that's going to continue. There's very little earnings, and so people are going to be trading on sentiment and policy. The policy that's going to be in the spotlight is when Republicans and Democrats are debating infrastructure during the elections," Jacobs said.
As such, his pick was the Global X U.S. Infrastructure Development ETF (PAVE), which has run nearly 32.5% in 2019 and counts Martin Marietta Materials, Vulcan Materials and Kansas City Southern among its top holdings.
Because infrastructure is "one of the rare instances of consensus across the aisle," Global X expects "a lot of progress in 2020" in the way of federal investment, Jacobs said.
"2020 is an election year. There's going to be so much focus on policy," he said. "I think it's very likely that we could see progress towards an infrastructure bill. We've seen Trump float a trillion dollar bill. We've seen Biden float a $1.3 trillion policy. So, our ETF, PAVE, is not looking at existing infrastructure — it's the builders of new infrastructure."
Disclosure: Tim Seymour is portfolio manager of the Amplify Seymour Cannabis ETF (CNBS) and is on the advisory board of The Green Organic Dutchman, Heaven, KushCo Holdings, Dionymed, Tikun Olam, CCTV and Canndescent. Stocks in CNBS must be legal in the countries in which they operate. All of the ETF's holdings are listed here.
