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Cathie Wood Rises To The Top Again — If You Ignore This Fact

Cathie Wood Rises To The Top Again — If You Ignore This Fact

THE return of Cathie Wood ARK Innovation (ARKK) has fascinated investors in 2023. But that’s only part of the story of the year — and the details reveal where the top ETFs and the S&P 500 are headed.


Certainly, Wood’s ARK Innovation has returned more than 72% in 2023 through December 26, according to Morningstar Direct. This makes the $9.5 billion asset ETF the best-performing, actively traded U.S. diversified ETF this year. It wins by a wide margin, outpacing Fidelity Blue Chip Growth ETFs (FBCG) 58% yield. And it easily beats the S&P 500’s 26% return.

But if we look beyond U.S. diversified ETFs, ARK Innovation’s returns seem less impressive. The fund’s performance ranks it 70th out of the entire ETF universe in Morningstar’s database.

What beats ARK?

Investors are looking beyond the S&P 500 for big returns

The fact that ARK Innovation’s returns pale in the middle of the entire ETF universe tells the real story of 2023. Risk is there. Even more speculative games on cryptocurrency and leveraged investing on the AI ​​leader Nvidia (NVDA) and cryptocurrency company Coinbase (PIECE OF MONEY) exceed ARK. GraniteShares 1.5x Long COIN Daily ETF (CON L), which amplifies returns on Coinbase, is up 634% this year.

In other words: Investors don’t seem to be taking enough risk between now and 2024. Now that looks like the Federal Reserve will reduce interest rates in 2024, investors believe that it is once again possible to speculate safely. Think about bitcoin.

“ETF performance in 2023 reflects renewed interest in higher-risk growth investments,” said Roxanna Islam, head of sector and industry research at Vetta Fi. “The best performing ETFs included blockchain and crypto stocks… which benefited from the rise in bitcoin prices following the announcement of the impending launch of the bitcoin spot ETF.”

Interestingly though, most investors have been playing it safe for much of 2023, said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. This is because the Fed has curbed speculation for most of the year by raising interest rates.

ETFs linked to government bonds have benefited from strong money flows all year, Bartolini pointed out. Investors also poured cash into large-cap U.S. equity funds. But caution vanished as investors sensed the rate hikes were over.

These ETF flows “reflect the behavior of investors who hesitated to express their risk for 10 months of the year, only to finally capitulate and take risks in November and December when it was clear that rate cuts were looming on the horizon,” Bartolini said.

A look at large-cap technology

The investors’ dilemma, moving from caution to speculation, has nowhere been more evident than with the so-called Magnificent Seven. The seven largest tech-related stocks in the S&P 500 generated the bulk of the S&P 500’s gains in 2023.

Investors have paid up for these companies, most because of their exposure to AI. These big tech stocks appear to have such enormous growth ahead of them that they have been somewhat sheltered from rate hikes. Technology dominated all major sector funds in 2023. ARK Next Generation Internet ETF (ARKW) was #1 with a yield of 100%. It was closely followed by MicroSectors FANG+ ETN (FNGS), with a yield of 97%. “It’s Momentum Chasing 101,” Bartolini said.

Islam, however, said S&P 500 tech stocks are a safe haven.

“Large-cap tech stocks have benefited from the AI ​​boom despite rising interest rates and the possibility of a recession,” Islam said. “Even though large-cap technology companies have significant growth potential, there is also a sense of safety around large-cap stocks on a large industrial scale.”

What investors avoid

If speculation and technology were in fashion, what was it? Energy and prudence.

The worst ETFs of the year included ProShares Ultra Bloomberg Natural Gas (BOIL), which recorded a colossal total loss of 92%. But betting against tech stocks was also costly. The MicroSectors FANG+ 3X Inverse Leveraged ETN (FNGD) also plunged by more than 90%.

Dividend and utility stocks also performed poorly. Their returns seemed less impressive when investors could get 4% or more just by putting money in a savings account. The SPDR S&P Dividend ETF (SDY) was lagging behind with a return of just 2.5% in 2023. And the Utilities Select Sector SPDR ETF (XLU) fell by 7.7% over the year, even including dividends.

Investors simply found new ways to earn income in 2023. “While dividend ETFs weren’t that popular among ETFs, there was a rise in covered call ETFs like JPMorgan Equity Premium Income (OFTEN) and JPMorgan Nasdaq Equity Premium Income (JEPQ),” Islam said. Both ETFs generate income by selling options on the S&P 500 stocks they hold.

Utilities and ESG are out

“As a result, earnings growth and confidence in utilities were also excluded from the S&P 500 rally in 2023. With overall growth in question, weak areas were avoided,” Bartolini said. “Utilities have historically performed well during recessions, but no recession has occurred in 2023, further weakening their arguments.”

Another area that ETF investors have been avoiding? Environmental, social and governance (ESG) funds, Islam said.

“The largest outflows were seen in the iShares ESG Aware MSCI USA ETF (JUMP) — an ESG ETF. This year, investors have focused more on returns rather than the qualitative factors that underpin ESG ETFs or certain thematic ETFs,” she said.

What happens to ETFs in 2024?

There’s one thing that never goes out of style with ETF investors: low fees. Active ETFs with stocks selected by top investment managers – like Wood – are also popular. Both trends are expected to continue.

“Low-cost funds took 57% of all flows, and active funds took 25% of all flows,” Bartolini said. “On average, low-cost funds take almost 60% of that each year, so I think you’ll be able to reinvest that next year.”

Active ETFs “have increased their flow market share every year for the past five years,” he said. “I would expect that to continue.”

Also expect an unwinding of exaggerated trends, Bartolini said. This includes the influx of liquidity into money markets.

“Nearly $1 trillion was invested in money market mutual funds as rate hikes sent yields to 15-year highs. With rate cuts, as many as three or four likely to occur in 2024, all that money faces reinvestment risk. “I would expect money market funds to face redemptions, and that money to be primarily invested in ETFs,” he said.

Meanwhile, Islam believes crypto ETFs are only getting hotter. “Cryptocurrencies will likely continue to be in the spotlight in the first half of 2024, and I expect flows into bitcoin spot ETFs to be larger than the launch of ether futures ETFs in 2023,” he said. she declared.

Return of S&P 500 sectors

Technology has been so dominant all year that investors haven’t paid attention to other sectors. Flows into sector ETFs have been moderate in 2023, Bartolini said. But it is an area likely to relive in 2024.

“Taking active risks in certain sectors just hasn’t been rewarded (in 2023),” he said. “Given that it is more likely than not that market breadth will not be as concentrated in 2024, sector allocations should increase in line with the increased dispersion of returns.”

But one thing is certain. ETFs remain one of investors’ favorite ways to play almost any asset class. “With that in mind, over $800 billion in ETF inflows in 2024 is reasonable,” Bartolini said.

The best performing US diversified ETFs in 2023

NameTeleprinterAnnual return
ARK Innovation (ARKK)72.18%
Growth of Fidelity Blue Chip (FBCG)58.36
Invesco NASDAQ100 (QQQM)55.46
Invesco QQQ Trust (QQQ)55.29
Renaissance IPO (Initial Public Offering)53.20
Harbor Long Term Producers (EARN)52.81
Vanguard Mega Cap Growth (CNS)51.91
Schwab US Large Cap Growth (SCHG)50.50
Blue-chip growth from T. Rowe Price (TCPP)50.05
Motley Fool 100 (TMFC)47.38
Sources: Morningstar Direct, S&P Global Market Intelligence, IBD

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