These were the best-performing funds and sectors in 2021

With less than ten weeks left to use this year’s ISA allowance of £20,000, investors may be considering where to invest their stocks and shares ISA.

After a rocky year in 2020 as a result of the pandemic, markets bounced back in 2021, delivering some impressive returns. But who were the winners? I’m going to reveal the best-performing funds and sectors in 2021 and the factors that contributed to their success.

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What were the best-performing funds in 2021?

According to Trustnet, these were the best-performing funds in 2021:

Eight of the 10 best-performing funds were invested in the energy sector, which profited from oil and gas prices reaching a seven-year high, amid a spike in demand as economies started to recover from the pandemic.

However, these gains were largely a reversal of the energy sector’s performance in 2020, when it was hit by the huge fall in demand for energy. According to Forbes, the energy sector was the worst-performing S&P 500 sector in 2020, with an average loss of 37%.

Interestingly, the four highest-performing funds were passive rather than actively managed funds, meaning they aim to replicate an index or benchmark. Passive or ‘tracker’ funds tend to charge a lower annual fee. The iShares S&P 500 Energy Sector fund has a total expense ratio of 0.15% compared to 0.99% for the Guinness Global Energy fund.

What were the best-performing sectors of 2021?

These were the five top-performing sectors in 2021, and their returns in 2020 for comparison, according to Trustnet:

With a return of 28.3%, the Indian subcontinent was the best-performing sector in 2021, after its dramatic bounce-back from the coronavirus wave in the first part of the year. There’s been a flurry of IPOs by technology firms, and Citywire reports that the “size of India’s stock market is set to overtake the UK.”

North America also performed well, rising from seventh place in 2020 to second place in 2021, with a return of 25.5%. Despite the pandemic and supply chain issues, the large technology stocks, including Alphabet (65%), Microsoft (51%) and Apple (34%), had a stellar year in terms of share price rises. However, Bloomberg reports there’s been a “stampede out of tech” in 2022 as inflationary concerns hit the valuations of high-growth technology firms.

After a modest 2020, the Commodity and Natural Resources sector was the third highest-performing sector at 24.0%. As commodity prices typically rise when inflation accelerates, this sector benefited from investors looking to find a hedge against high inflation rates.

The UK Smaller Companies sector also produced a top-five return of 22.9% in 2021, having had a flat 2020. Small-cap companies often perform strongly when the market is improving and may deliver higher growth than large-cap stocks. Fidelity UK Smaller Companies was the highest-performing fund within this sector in 2021, achieving a 34.5% return.

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How to invest in these funds

A stocks and shares ISA is a tax-efficient way of investing in funds. It’s worth reviewing our top-rated stocks and shares ISA providers before you make your choice.

Here are some tips to get you started:

• Decide what type of fee structure is the best value option for your ISA. Providers such as Hargreaves Lansdown charge a percentage fee on the value of your portfolio but no charge for buying or selling funds. Interactive Investor charges a flat monthly fee but charges £7.99 for buying or selling funds.
• Review the range of funds available. Providers such as Hargreaves Lansdown and Fidelity offer investors a choice of over 3,000 funds. By comparison, Vanguard offers a more limited range of 70 of its own funds.
• Consider diversifying your portfolio. There is a wide range of investment options from different sectors to different countries. Passive funds that track an index may be attractive to investors looking for a low-cost option rather than trying to pick a top-performing active fund.
• You can currently invest up to £20,000 in a stocks and shares ISA. There are fewer than ten weeks left to invest before the current tax year ends on 6 April.

It’s important to understand that past performance is not an indication of future results and that the value of investments may go down as well as up.