The year-end rally in stocks and bonds has created an opportunity for investors to reassess their portfolios at a time when the ETF industry is launching new products in areas including active fixed income and, potentially, cryptocurrencies. The best-performing ETFs in a given year are ultimately a function of what's happening in the broader markets. Investors should make sure they understand not only how a fund might perform in different market environments, but also how their purchase changes their portfolio. This is especially true after the narrow 2023 market rally, which increased the concentration of the largest tech stocks in the S&P 500. That means investors who buy market-cap-weighted broad-stock ETFs, or certain sector funds, In a sense, we are doubling down on names like Nvidia and Meta Platforms. That could prove painful if tech stocks reverse course in 2024. "The risk to the tech sector would appear to be twofold: meeting higher expectations and whether meeting those expectations will be enough of a payoff in the 2023 bill," the chief strategist wrote. ProShares Investment Manager Simeon Hyman. in the company's prospects for 2024. "Let's triple that figure by adding concentration risk: Apple, Microsoft and Nvidia represent more than 50% of the market capitalization of the technology sector." XLK YTD Mountain Technology-focused ETFs like XLK have outperformed the broader markets in 2023, but can be heavily concentrated in a few companies. Investors can get the most out of their investment by using ETFs to diversify into areas of the market that are less represented in their main portfolio. "We expect high-yield, high-quality 'Prudent Yield' credit assets to outperform bond benchmarks," Bank of America ETF strategist Jared Woodard said in a Dec. 6 note to clients. "In equities, investors should diversify with emerging market small-cap stocks, South Korea and US defense stocks. Gold and resources stocks are attractive hedges," he added. Some of Bank of America's top fund ideas for the new year are the Vanguard Emerging Markets Government Bond ETF (VWOB) and the Invesco Aerospace and Defense ETF (PPA). Bitcoin Funds The most anticipated development for ETFs in 2024 is the possible arrival of spot bitcoin ETFs. The Securities and Exchange Commission has been meeting with asset managers about their applications for such funds and a decision is expected in January. The involvement of major asset managers like BlackRock and the billions of dollars already invested in bitcoin through the Grayscale Bitcoin Trust (GBTC), which could become an ETF, suggest that bitcoin funds could be a huge category. Excitement around the possible approval of a bitcoin ETF has helped bitcoin soar back above $40,000 in the final weeks of the year, but there is still some skepticism among financial advisors about the ultimate demand for ETFs. of bitcoin. BTC.CM= Mountain to date Bitcoin has climbed back above $40,000, driven by hopes that a new ETF will allow new investors to buy cryptocurrencies. Active and fixed income A major source of change in the ETF market over the past year was active management, which became easier to do in an ETF after a regulatory change in 2019 and finally took off in 2023. Active funds accounted for About 75% of new ETF launches and 25% of net flows in 2024, as of mid-December, according to John Hooson, managing director of the global ETF products team at Brown Brothers Harriman, are rapid growth in a industry known for its passive management. "I think active ETFs are where we'll see growth. We certainly saw that in 2023. There's still a lot of room to catch up," said Marlena Lee, global head of investment solutions at Dimensional Fund Advisors, which has had success with funds systematic assets, or ETFs, that largely track market segments but also have the flexibility to make small, discretionary moves. Part of the growth in actively managed ETFs is due to popular income-generating strategies using options, such as the huge JPMorgan Premium Equity ETF (JEPI), while one of the most successful fund launches of the year, as measured by net inflows, It was the BlackRock Flexible. Income ETF (BINC), run by star bond manager Rick Rieder. Many industry experts see bond funds as a key source of future growth. "The flows that have kept mutual funds going have been active fixed income flows," said Bryon Lake, global head of ETF Solutions at JPMorgan Asset Management. "People still want active fixed income... The jump into active fixed income and getting that exposure into the ETF wrapper is where I think the game changer will happen." JPMorgan's Ultra Short Income ETF (JPST) is the largest active bond ETF on the market, and the firm launched a longer duration fund (JBND) in October. What's next for cash? Bond funds could be well positioned to grow by attracting some of the more than $5 trillion deposited in money market funds, which will likely cause some investors to flee if the Federal Reserve cuts rates. Investors who want to maintain a similar level of returns can try longer-term bond funds. "We're certainly hearing more conversations that I'm starting to get back into some part of the fixed income market, whether that's lengthening my duration on the ultra-short side and then jumping into the middle of the market." curve to exit," said Noel Archard, global head of ETFs at AllianceBernstein. Archard's firm launched five new bond funds in December. And, of course, some of that money could also go into stock funds, especially if investors feel hurt about missing out on the recent rally. โEven with the higher near-term returns, we believe there is an opportunity cost to not investing in equities or not having a broader investment opportunity in fixed income,โ Lee said from Dimensional.
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ETFs in 2024: Bitcoin funds and active bond plays are potential winners in the year ahead
