Global ETF trends to watch in 2024

It often feels similar when drafting a year ahead outlook—wondering what geopolitical or third- standard-deviation event could disrupt any forthcoming predictions and be the derailing punch! Last year was no different; however, our expectations for a tactical shift were largely accurate.

We believe 2024 points to more macro volatility as the duration trade continues, albeit in reverse. This macro uncertainty is the current anchor, influencing both equity and bond markets globally. We, therefore, believe this volatility favours a more hands-on approach to managing investments over the coming year.

Active management has never been more important, so we believe utilising core and satellite equity exchange-traded fund (ETF) building blocks coupled with active fixed income ETFs will be key to success.

My 2024 predictions follow:

1. Active fixed income ETFs will see increased investor inflows.

Global inflation has fallen month-on-month into November 2023, and at as of the beginning of December, European equity markets are pricing in 150 basis points of interest-rate cuts from the European Central Bank in 2024, so it seems pretty clear that rates are going to come down. The question is: when? Some of the earliest central banks to raise interest rates, such as Brazil, are now the first to reverse their hawkish stance and can now serve as the canary in the coalmine in terms of measuring the effectiveness of their monetary policy approach. The focus now turns to the economic “landing” story, wherein a small uptick in unemployment in the United States and Europe may suggest a softening of the labour market and an impending hard landing (recession) as we enter the next calendar year.

Against the backdrop of a suggested downturn looming, we believe fixed income will be in focus again this year—specifically, duration and credit worthiness. Therefore, we believe fixed income ETFs that offer longer duration and better-quality credit should see the greater share of net inflows in 2024. We also believe an active approach to fixed income investing makes sense in this volatile period. Additionally, any such bond offerings providing a “green” overlay will benefit from the ongoing positive momentum bolstering sustainable investment opportunities.

2. Being selective with emerging markets may aid outperformance. Hence, single-country emerging market ETFs likely to see increased assets under management (AUM).

Assuming that 2024 brings coordinated central-bank dovishness, we see two distinct potential paths. Firstly, we see a potentially weakening US dollar that drives strength and a redirection of capital flows into emerging market (EM) economies, which have struggled to attract foreign investment in recent times. As a result, select emerging market economies exposed to both domestic and export growth should be well-poised to outperform. Secondly, one must be wary of the counter-argument that in a risk-on environment there are potentially better options than EM investment, such as quality fixed income, the Magnificent Seven or the stalwart growth-heavy S&P 500 Index. Staying with the former, focus must be set on the markets with value and growth potential, the so-called “diamonds in the rough.” We’re bullish on tech-heavy EM economies such as Taiwan and South Korea, which, due to their strong presence in the semiconductor industry, are well-positioned to benefit from the tailwinds of artificial intelligence (AI) development.

India is also a key market of interest, due partly to secular developments. Its demographically advantageous population also leads it to be a key player, not only as a potential outperformer within key EM indices (alongside Brazil and South Korea), but also globally. We again, therefore, believe in the merits of a more active/tactical approach to managing a broad EM strategy utilising low-cost single-country emerging market building blocks to over/underweight relative to the broad benchmark.

3. Growth, thematic and technology: Thematic growth-focused ETFs will see strong inflows.

I’m a firm believer that we are at a pivotal moment societally and stand at the proverbial crossroads of one of the most transformative waves in our short history. The ever-fast developments of AI, including the recent strides of artificial generative intelligence (AGI), are signs that we are in the midst of the next revolution, almost as important as the agricultural or manufacturing revolutions of the past. With the speed at which this development is taking place, fuelled by the autonomous nature in development of AI, it’s important to consider potential investment opportunities. Thematic investing allows investors the ability to tap into these long-term structural trends, targeting areas of the market that are at the forefront of this growth in sectors that are seeing monumental transition. For example, within healthcare, we are seeing the emergence of new preventative methods and technologies for disease avoidance as well as innovative technologies playing their part in the operating theatre—all of this against the backdrop of an ageing population. In addition to this, new emerging technologies are being prioritised to help mitigate a world under severe threat from the impacts of climate change (drought/ famine). Often such thematic opportunities support growth not only in quaternary sectors like AI and technology but evolving structural changes in primary and tertiary sectors like food and healthcare.