2020 could flip the script for ETF investors.
After a decade of U.S. large-cap stocks outperforming commodities and emerging markets, the trend may now be swinging in the other direction, leaders in the exchange-traded fund industry told CNBC's "ETF Edge."
While the SPDR S&P 500 ETF Trust (SPY) has run over 182% in the last 10 years, the Energy Select Sector SPDR Fund (XLE) and iShares MSCI Emerging Markets ETF (EEM) each only climbed about 4% in the same time frame. Other ETFs tracking commodities like metals and China exclusively also dramatically underperformed.
John Davi, founder and chief investment officer of Astoria Portfolio Advisors, has his eye on both underdog groups for the year ahead.
As for commodities, "I think they're cheap," Davi, whose firm put out its top 10 ETF recommendations for 2020 last week, said on Monday's show. "I think it's a play on inflation. On days like Friday and today, what happens? Stocks go down, oil goes up, gold goes up, gold equity goes up, so, I think it's a nice portfolio diversifier to have."
Armando Senra, who runs iShares Americas for BlackRock, also sees increasing "interest in China," which he said was "always a good play" to include in a portfolio. Senra's firm runs the largest China ETF in the world by assets under management, the iShares MSCI China ETF (MCHI).
"That said, for 2020, I would pivot to emerging markets," Senra said in the same "ETF Edge" interview. "There's more room for growth with a pickup in growth globally. You also have the benefit of the availability to make changes in monetary policy. They still have room to move, especially emerging markets ex-China."
Part of that had to do with a number of emerging markets having a degree of flexibility when it came to monetary policy, Senra said, and potentially reaping benefits "from a more stable trading environment" around the world.
But Davi wasn't keen on buying into emerging markets without the growth Chinese stocks provide.
"I think that for EM to work, China has to work," he said, adding that China's expected earnings per share growth for 2020 is higher than that of the United States. "China's injecting a lot of liquidity into the system. So, we use MCHI in our portfolio, [and] that's one of our top picks."
With $4.77 billion in assets, MCHI is a broad-based China ETF, holding 597 securities listed in both Hong Kong and mainland China. Alibaba and Tencent are its two biggest holdings, making up nearly 30% of the portfolio. The ETF has gained about 23.5% since its launch in early 2011, helped by a nearly 22% run for 2019.
"On a multiyear basis, you have more upside overseas than you do here in the U.S.," Davi said. "The trade of the decade has been large-cap U.S. stocks, large-cap growth, so, ultimately, capital gets allocated to look for the highest return per unit of risk. I think there's a lot of risk in the U.S. large-cap growth market, so, I'd look overseas if I'm investing on a multiyear basis."
Senra agreed, adding that the inflows into emerging market and China-based ETFs are already well underway.
"You're beginning to see more money flowing into emerging markets. That began last year, in the fourth quarter of last year," he said. "The other market that we haven't mentioned is Japan. ... That's another market that we [think] will see a benefit in a pickup in growth and a more stable trading environment and more investment in manufacturing and growth in manufacturing."
Disclosure: Astoria Portfolio Advisors has a position in MCHI.