ETFs
5 predictions for ETFs in the second half of 2024
Wall Street ended the first half of 2024 on a high note. The S&P 500 index gained 14.5%, while the Dow Jones Industrial Average advanced 3.8%. The Nasdaq Composite Index outperformed, climbing 18.1%.
The artificial intelligence (AI) hype, bets on lower rates and strong corporate earnings growth have been the main catalysts for the stock rally and will continue to do so for the rest of the year. Wall Street analysts have become more bullish on stocks, citing these factors as a strong combination.
Additionally, seasonality in stocks will prove beneficial if we look at history. In 1928, the S&P 500 index gained 10% or more at the midpoint for 29 years. By the end of the year, the average gain was 24%. According to Comerica Wealth Management, the S&P 500 index could gain another 10% by the end of 2024.
The upcoming recovery will be supported by some of the highlights of the first half of the year and a few new trends. Below, we have highlighted five trends that could influence the market over the remainder of the year.
“The Magnificent Seven” continues to grow
The “Mercenary Seven” are the main growth engine of the technology sector and the S&P 500 as a whole. They now represent 31% of the weight of the S&P 500. In the first half of the year, about 60% of the gains were generated by the “mega-cap” technology companies: NVIDIA (NVDA), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META) and Apple (AAPL). NVIDIA alone accounted for 31% of the market’s advance in the first half.
With this latest surge, NVIDIA, Apple and Microsoft are in the race to become the world’s most valuable company and reach a $4 trillion market cap on the back of growing enthusiasm for AI capabilities. This tech-driven momentum is likely to continue through at least the summer (read: Tech Sector Leads H1 Rally: Top 5 ETFs).
Roundhill Magnificent Seven ETF MAGS is the best bet to take advantage of the Magnificent Seven boom. It is the first-ever ETF that offers investors equal-weighted exposure to the Magnificent Seven stocks. MAGS has accumulated $578.3 million in its asset base and charges 29 bps in fees per year.
The rise of AI will continue
The rise of artificial intelligence will continue to fuel the recovery of the overall market, with companies investing heavily in the technology sector and beyond. The expansion of applications of artificial intelligence promises to open up new growth opportunities. According to a new report from Grand View Research, the global artificial intelligence market is expected to grow at a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030.
Even though the technology seems to have become expensive, utilities remain an untapped area. AI is increasing the demand for electricity as data centers require tons of energy for computing and cooling. A simple ChatGPT task consumes 10 times more energy than a regular Google search. Thus, data centers with a capacity of 30 megawatts are increasing their capacity to handle 300 megawatts of electricity. This has made the traditional utility sector of the market the most attractive (read: ETFs to Make the Most of the AI-Powered Utility Sector).
Investors looking to capitalize on the next phase of the AI industrial revolution should consider utilities sector ETFs. Utilities Select Sector SPDR (XLU) is one of the most popular and largest ETFs in the sector, with $13.8 billion in AUM. It seeks to provide exposure to companies in the electric utilities, water utilities, multiple utilities, independent power and renewable power producers, and gas utilities sectors. XLU tracks the Utilities Select Sector Index, charging 9 bps in annual fees. It has a Zacks ETF Rank #3 (Hold).
The story continues
Rate cuts in sight
At the last FOMC meeting, U.S. policymakers forecast one rate cut this year and four cuts by 2025. The Fed amended the wording of its statement, stressing that there had been “modest further progress toward the Committee’s 2 percent inflation target.” Previously, the statement had stressed a “lack” of further progress.
The latest data points to a slowing economy, raising fresh hopes for a rate cut in September. The U.S. services sector contracted at its fastest pace in four years in June. Traders are now pricing in a 74% chance of a rate cut in September, according to the CME’s FedWatch tool. Low rates reduce the cost of borrowing, which is often needed to finance business expansion, thereby boosting growth. That can have a positive impact on sectors like real estate, consumer discretionary and financials, which are typically sensitive to interest rate changes (read: Sector ETFs Benefit from Rising Rate Cut Bets).
In the real estate sector, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, lower borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can squeeze banks’ net interest margins, they can also encourage lending and potentially lead to increased lending activity to consumers and businesses.
Therefore, investors could bet on one of these sectors to amplify their gains for the rest of the year. Some of the top-ranked ETFs are VanEck Retail ETF RTH and Selected Financial Sector SPDR ETFs XLF.
Individual Stock ETFs Remain Popular
Single-stock ETFs have gained popularity over the past year, amid a surge in stock markets and the tech boom. Unlike traditional ETFs, which typically track a broad index or sector, single-stock ETFs provide exposure to the performance of a specific company using derivatives. This allows investors to gain exposure to a particular stock without having to buy it directly.
According to Morningstar data, there are currently four dozen individual stock ETFs on the market, with a combined $3.5 billion in assets. Five companies—AXS, Direxion, YieldMax, GraniteShares, and Innovator—offer all of the individual stock ETFs currently available on the market.
ETF T-REX 2X Long NVIDIA Daily Target NVDX and GraniteShares 2x Long META Daily ETF FBL is the big winner, up 449.5% and 75.7% respectively. NVDX offers two times (200%) the daily percentage change of NVIDIA common stock, while FBL tracks two times the performance of Meta Platforms shares.
Elections to increase market volatility
Stock market volatility is expected to intensify as the United States heads to the polls to elect the next president on November 5.
Former President Donald Trump has widened his lead over President Joe Biden in two major polls following the first 2024 presidential debate. Trump leads Biden by six points in a new New York Times/Siena College poll, a three-point swing in Trump’s favor since a poll a week earlier. It’s also Trump’s largest lead in any poll conducted by the groups since he launched his first presidential campaign in 2015. A Wall Street Journal poll also found Biden trailing Trump by six points, the largest lead Trump has had over Biden in the Journal’s polls since 2021 in a two-person contest, and a four-point increase in Trump’s lead since February.
In such a scenario, dividend investing seems to be the best choice as it offers a steady and safe income. The strategy does not offer spectacular price appreciation but is a major source of steady income for investors in any market. Top-ranked dividend ETFs like Vanguard Dividend Appreciation ETF VIG, Vanguard High Dividend Yield ETF VYM and iShares Core Dividend Growth ETF DGROs seem to be interesting choices (read: Guide to the 10 most popular dividend ETFs).
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ETF SPDR Financial Select Sector (XLF): ETF Research Reports
VanEck Retail ETF (RTH): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
iShares Core Dividend Growth ETF (DGRO): ETF Research Reports
Roundhill Magnificent Seven ETF (MAGS): ETF Research Reports
GraniteShares 2x Long META Daily ETF (FBL) : ETF Research Reports
ETF T-REX 2X Long NVIDIA Daily Target (NVDX): ETF Research Reports