After the astonishing shocks of 2020, this year has been a steady and rewarding one for investors so far. The S&P/ASX 200 Index has returned nearly 13% year to date, and despite falling from its recent highs, remains above its pre-COVID peak.

After the sharemarket roared back from its sharp fall in February-March 2020, investors have also been the beneficiaries of generous dividends (with a current yield of around 4.5%), a robust mergers and acquisitions environment, and share buybacks with preferential tax treatment.

So how are investors responding to the share market’s impressive return to health?

One of the most critical factors in understanding investor behaviour post-COVID is the extent to which investors held (or bought) shares through last year’s crash. Investors who sold into the COVID panic, when the ASX200 fell over 30% in three weeks, or during the market’s return to its peak (which didn’t occur until mid-2021, over a year later), may still be nursing losses to their portfolios. Those who held on, or who took the opportunity to top up their holdings, are likely to be well in the black.

Behavioural psychologists will refer to historical data, which shows investors are likely to sell their holdings when the market reaches its lows, and not buy back in until it has rallied at least 20%, resulting in crystallised losses overall.

nabtrade data

At nabtrade, investors did the opposite – between 20 February and end July 2020, over 80% of trades via nabtrade were buys, with investors taking advantage of depressed share prices to stock up on favourites. These investors are almost all sitting on sizeable gains, in financials, buy-now-pay-later, and travel stocks in particular.

It’s also worth noting that more than a third of nabtrade’s investors bought shares for the first time in 2020. These were all new accounts; over a million Australians opened an online trading account and bought shares for the first time during this period. Their timing was impeccable – for many, the biggest challenge is working out how to replicate their initial successes.

[Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to licensed financial adviser before acting on themes in this article].

Popular stocks

While investors have continued to buy and hold through 2021, there has been a shift in the composition of their holdings.

Travel stocks that were hugely popular in 2020, including Qantas (ASX: QAN), Flight Centre (ASX: FLT) and Webjet (ASX: WEB), have been favoured less by nabtrade customers this year.

Financial stocks were in demand from investors at their lows in 2020, which arrested a long term trend of reducing exposure to this sector; financials peaked at around 35% of the average portfolio and have been drifting down over the last 5 years, before spiking again in mid-2020.

Nabtrade data shows the financial stocks have been held and trimmed since 2020, although generally remain in the top 10 most traded stocks.

What have investors bought

The biggest trade on nabtrade in 2021, by a substantial margin, has been Fortescue Metals Group (ASX: FMG), a pure iron-ore play that has been the beneficiary of a soaring (and then flagging) iron ore price.

The iron-ore price rocketed to $US230 a tonne in early 2021, dramatically outstripping its long-run average price of around $US60/t (Treasury forecasts at $US55/t). However, in recent months, the price of iron ore has fallen from its highs to settle at around $US120/t.

BHP Group (ASX: BHP) has also been a popular buy with nabtrade investors, although in considerably smaller volumes. nabtrade investors have typically been underweight resources as retirees have sought yield, primarily through financial stocks.

2021 has brought about a significant rethink for those who learned early in their investing careers that resource stocks do not generate income for a portfolio.

BHP is on a trailing dividend yield of over 12%, with Rio Tinto (ASX: RIO) over 13%. [Editor’s note: investors should also consider a company’s future dividend. A trailing dividend is based on past earnings.]

BHP and RIO were both bought enthusiastically cum-dividend [when a company has declared there will be a dividend but not yet paid it] during reporting season.

ETFs in demand

In addition to resources, exchange traded funds (ETFs) have enjoyed strong interest with nabtrade investors the last two years.

At around 4% of holdings and turnover on nabtrade in 2019, ETFs were a modest, if growing, proportion of investor portfolios. The influx of new investors in 2020 saw interest explode, and ETFs are now 9% of total holdings, having more than doubled.

New and young investors are twice as likely to buy ETFs as retirees, and the most popular index replicated is the ASX200, followed by the S&P500 and the Nasdaq 100. These ETFs are generally bought in relatively small parcels and rarely sold, as newer investors look to build a portfolio over time.

Investors more hesitant

Beyond resources and ETFs, there are few sectors that are attracting great enthusiasm from investors. There is a clear shift in sentiment from bullish (February to end 2020), to hesitant (mid to late 2021), for which the strongest signal is the significant growth in investor cash holdings and moderation in buying.

Cash holdings peaked on nabtrade in February 2020, right before the market collapsed, then fell as investors bought into the share market. Investors also brought funds in from other sources during this period to top up their buying, which prevented cash levels from falling dramatically.

As the market has recovered, cash balances, both average and total, have continued to climb, and now sit at record highs.

Given that interest rates sit at close to zero, this reflects concerns about the future direction of the market, rather than a desire to earn a secure yield. Many nabtrade investors feel that the market has run ahead of the economy, which is facing significant headwinds (rising inflation, elevated asset prices, an energy crisis in China and Europe, a shaky Chinese property development sector and more).

Ultimately, many investors are hoping for another chance to repeat their wins of 2020, buying high-quality companies at a significant discount and seeing a rapid return to peak prices. Whether they’ll receive that opportunity any time soon remains to be seen.