ETFs
These types of ETFs could prove winners in the second half of the year
The rally to record stock market highs and the launch of new bitcoin funds have made the first half of 2024 notable milestones for the ETF industry. The second half of the year brings hurdles that hurt the chances of a repeat performance. The best-performing ETFs in the second half of the year will likely be determined by broader changes in markets and the economy. Wall Street is waiting to see when the Federal Reserve begins cutting interest rates amid signs that economic growth is already starting to falter. “The biggest visible risk to this rally is that the Fed stays too hawkish for too long,” said Michael Arone, chief investment strategist for the US SPDR Business at State Street Global Advisors. However, even with growing uncertainty, certain types of ETFs could emerge as winners. Stocks A handful of stocks were the big winners in the first half of the year, and some narrowly focused ETFs were able to ride that wave. Assets in the Roundhill Magnificent 7 ETF (MAGS), for example, have reached more than $500 million. Single-stock funds tied to Nvidia have also attracted strong interest, including the GraniteShares 2x Long Nvidia ETF (NVDL). MAGS YTD mountain The success of mega-cap tech stocks has been a key part of this stock market rally, including among ETFs. The Magnificent 7 ETF is up more than 40% in 2024. Strategists at major ETF firms aren’t calling for investors to completely move away from these giant stocks, but are suggesting finding ways to dilute exposure. “We want to be exposed to them, but a lot of portfolios already have massive exposure to the Mag 7, or it’s now become the Fab 5,” Arone said. “Ultimately, we encourage them to think that other companies beyond these are also going to benefit from the huge investments that companies across all sectors and industries are making in AI. I guess in some ways, we’re hoping to have our cake and eat it too.” ETF companies have struggled to find AI-themed ETFs that work, but there are options to give investors exposure to companies in this space without focusing solely on Nvidia and Microsoft. For example, the SPDR NYSE Technology ETF (XNTK) currently has Nvidia as its largest holding, but with only about 5% of the total fund. The fund is equally weighted when it rebalances annually. Jay Jacobs, U.S. head of thematic and active ETFs at Blackrock’s iShares unit, is also bullish on AI-related funds as part of his mid-year outlook. “In the near term, we believe two mega forces in particular have the potential to reshape the global economy and could reach critical inflection points: 1) the transformative potential of artificial intelligence (AI) and its catalysis of a historic capital spending cycle; and 2) the growing impact of geopolitics on trade and technology amid a global wave of elections,” Jacobs wrote. Equity funds highlighted by iShares include the US Digital Infrastructure and Real Estate ETF (IDGT) and the US Tech Independence Focused ETF (IETC). Fixed-income bond funds have been a growth area for the ETF industry, particularly actively managed ones like BlackRock’s Flexible Income ETF (BINC) and Pimco’s Multisector Bond Active ETF (PYLD). But the new offerings haven’t had much impact on cash reserves, according to Todd Sohn, ETF strategist at Strategas. “While we are optimistic about the growth prospects for fixed income ETFs, we are surprised to see that retail money market AUM has now surpassed the combined AUM of retail mutual funds + ETF products – it took the 2008 financial crisis for the last observation to occur. 5% cash [yields are] “This is certainly helpful, but we tend to wonder if investors are overlooking opportunities in other areas, whether it’s stocks or bonds,” Sohn wrote in a July 2 note to clients. With the timing and magnitude of the Fed’s rate cuts still unclear, investors should be cautious when trying to capture interest rate moves, Arone said. “Many investors continue to be fixated on the idea of extending duration to take advantage of lower rates, and I think they underestimate how volatile and risky it has been,” Arone said. Arone suggested investors consider adding real assets like gold or floating-rate exposure instead. Top bank loan funds include the SPDR Blackstone Senior Loan ETF (SRLN) or First Trust’s Senior Loan Fund (FTSL). New Launches The biggest fund launch of the first half of the year came with new bitcoin funds in January. Those funds have racked up more than $14 billion in net inflows to date, according to FactSet, and continue to see demand. Next up are ether ETFs, which industry experts expect to be approved later this month. Matt Hougan, chief investment officer at Bitwise Asset Management, predicts that ether ETFs will eventually be less than a third the size of bitcoin ETFs, based on the size of the ether market and examples from other countries. Still, Hougan predicted $15 billion in net inflows in the first 18 months for ETH funds, which would make them one of the most successful new fund categories on record. Another problem with ETH funds is that they don’t allow for staking, a process that some crypto investors use to generate additional yield from Ether and other cryptocurrencies. However, Hougan said he doesn’t think this omission will be a major obstacle for ETF investors. “I think ETFs are just solving a problem for traditional investors, and if they can achieve that 99%, they’ll achieve that,” Hougan said.