Five megatrends to watch as ETF opportunities in 2024

It’s out with the old and in with the new megatrends for exchange-traded funds (ETFs).

ETFs often capture big-picture developments, and macro-equity and bond-market movements. These five trends are likely to grab the attention of investors in 2024:

1. AI will keep eating the world

Businesses, consumers and investors are gaining a better understanding of what artificial intelligence can do, says founding editor Nick Waddell of the Cantech Letter, based in North Vancouver. “Many of us in 2023 learned that AI tools such as ChatGPT were rather blunt instruments and were more prone to error than first expected.”

In 2024, he adds, we’ll see more accurate and specialized AI tools, leading to continued inflows to ETFs that offer exposure to this expanding and evolving corner of the technology sector.

2. A turn to protective buffers

Given the many risks from 2023 that will carry into 2024 – from conflicts in Ukraine and the Middle East to a possible recession – more investors may look to buffer ETFs, says Alfred Lee, a portfolio manager with BMO Asset Management in Toronto.

Markets could benefit from improving conditions, or go the other way. “Buffer ETFs allow investors to participate in the upside of broad equity markets while mitigating downside beyond a certain level.”

For example, the BMO US Equity Buffer ETF (ZOCT) provides exposure to the S&P 500 Composite, hedged to the Canadian dollar, while providing a buffer against the first 15 per cent of decrease in the market price.

3. Demographics and tech drive better medicine

Biotechnology is a perennial interest of ETF investors. That focus, especially in medical innovation, should propel this trend again in 2024, says Jay Jacobs, U.S. head of Thematics and Active Equity ETFs at BlackRock in New York. AI-driven health care and medical-tech advancements are poised to “revolutionize medicine.”

Demographic trends are also fuelling innovation. Mr. Jacobs says aging populations in major developed economies will lead to higher health-care spending overall, and a growing focus on breakthroughs to treat everything from Alzheimer’s disease, to neurodegenerative disorders, to cancer and cardiovascular disease.

4. The bond comeback continues

Fixed-income ETFs, once one of the coldest ETF asset classes amid rock-bottom interest rates, are likely to be a popular play in 2024, says Thane Stenner, senior portfolio manager with Stenner Wealth Partners+ in Vancouver, part of CG Wealth Management.

“Better bond yields and positive price movement finally arrived in 2023. Assuming a global economic slowdown, bond ETFs should show much better returns in 2024.”

Not all fixed-income ETFs will perform equally well. Cash-based instruments such as high-interest-savings ETFs will likely see outflows, especially if interest rates decline in the latter half of the year.

5. Get ready for the re-industrialization revolution

Many investors were convinced the 2010s were an economic dud, thinking that “slow growth and low inflation were permanent features,” says portfolio manager Tyler Mordy, chief investment officer with Forstrong Global Asset Management Inc., in Toronto.

Pandemic and post-pandemic inflation shifted the slant of the pitch, pushing those previous deflationary impulses aside. They gave way to a growing recognition that governments and corporations need to invest more in advanced manufacturing capacity and new resource development.

Amid this shift, Mr. Mordy says three drivers should gain momentum in the year ahead: decarbonization, re-globalization and re-militarization. “Many investment classes that struggled in the era of low inflation are poised to surprise in 2024.”

He says investors are likely to gravitate to ETFs offering exposure to companies involved in industries that include mining and the production of global metals, and to nations quickly building up their advanced industrial capacity, such as Mexico, Vietnam and India.