The year 2020 has been filled with historic twists and turns. After slipping into a bear market in late March, Wall Street made an astounding rebound with major indices soaring to historic highs. This is especially true against the backdrop of super-easy monetary policies coupled with COVID-19 vaccine optimism. A potentially divided Congress also added to the strength.

Below we discuss some of the events that dominated the headlines in 2020 and are worth watching in 2021:

Super-Easy Policies

The Fed pledged to hold rates at a near-zero level and will continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of maximum employment and healthy inflation. Additionally, the latest fresh stimulus will support the stock bulls. President Donald Trump signed the new coronavirus relief package of $900 billion, which includes a round of $600 direct payments, extends two federal unemployment programs, funding for the Paycheck Protection Program and a $300 per week unemployment compensation supplement.

The combination of cheap money policies and an added stimulus will continue to drive the stocks higher. In particular, the scenario seems more profitable for small-cap stocks as it ramps up the economic activities and results in higher spending, thereby boosting domestically-focused companies. Invesco S&P SmallCap Momentum ETF XSMO seems an excellent choice with AUM of $131.9 million and an expense ratio of 0.39%. This ETF offers exposure to stocks having the highest “momentum scores” by tracking the S&P Smallcap 600 Momentum Index. The product has a Zacks ETF Rank #2 (Buy) (read: 5 Small-Cap ETFs Set to Explode on COVID-19 Vaccines).

Digitization

The pandemic accelerated the digital shift, thus driving the e-commerce boom. As a large number of consumers avoid direct contact and prefer staying at home, demand for cloud computing, gaming, e-sports, streaming services and online shopping surged. While many ETFs from internet and e-commerce space seem excellent choices, ARK Next Generation Internet ETF ARKW has soared about 152% this year and the trend is likely to continue. This is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure to cloud, enabling mobile, new and local services. The fund holds 53 stocks in its basket with AUM of $5.5 billion. It charges 76 bps in annual fees from investors (read: Top-Performing E-Commerce ETFs & Stocks of 2020).

COVID-19 Vaccination

Coronavirus immunizations started in America with Pfizer PFE and Moderna MRNA vaccine shots while more are on the way. Other firms like Sanofi SNY, GlaxoSmithKline GSK, Merck MRK and Johnson & Johnson JNJ are also in the process of developing the vaccine. A vaccine will end the pandemic crisis and set the stage for a speedy economic recovery, thereby boosting demand for several types of products and services.

While the rally seems broad-based, the cyclical sectors are expected to benefit the most as these are closely tied to economic activities and outperform when the economy improves. Some of the top-ranked ETFs from these spaces are Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Industrials ETF VIS and Materials Select Sector SPDR ETF XLB, each currently carrying a Zacks ETF Rank #2 (read: Cyclical Sector Outperforming: 6 Cheap ETFs to Track).

Record Year for Inflows

Overall, ETFs gathered a whopping $509.4 billion this year as of Dec 17, topping the 2017 inflow record of $476.1 billion. U.S. equities outperformed, having pulled in $187.3 billion in capital followed by inflows of $177.8 billion in U.S. fixed income and $62 billion in international equities.

Vanguard Total Stock Market ETF VTI is the top asset creator of this year, having gathered $5.3 billion in new capital. It provides an exposure to the broad stock market by tracking the CRSP US Total Market Index. The ETF took advantage of the surging stock market, which made a series of new highs. It currently has a Zacks ETF Rank #3 (Hold). Vanguard S&P 500 ETF VOO and Invesco QQQ QQQ accumulated $21 billion and $17.7 billion, respectively, in 2020. The former tracks the S&P 500 Index while the latter follows the Nasdaq 100 Index. VOO has a Zacks ETF Rank #2 while QQQ carries a Zacks ETF Rank #1 (Strong Buy) (read: S&P 500 Set to Climb Higher in 2021: Bet on These ETFs).

Tesla Joins S&P 500

Tesla Motors joined the S&P 500 Index on Dec 21. The stock replaced Apartment Investment and Management Co. and represents 1.6% of the index. It is the sixth heaviest stock, trailing both of Alphabet's GOOGL share classes, Apple AAPL, Amazon AMZN, Microsoft MSFT and Facebook FB.

The electric maker has seen a meteoric rise of 696% year to date. It has an estimated earnings growth rate of more than 1000% for this year. Tesla has a Zacks Rank #1 and a Growth Score of A. Investors could tap Tesla with ETFs, such as iShares U.S. Consumer Goods ETF IYK and ARK Autonomous Technology & Robotics ETF ARKQ that have double-digit allocations to this luxury carmaker.