While it may be easy for many on Wall Street to get excited over a spot bitcoin ETF, there are still many ETFs that are set to perform well for 2024. With potential fluctuations in the market with Federal Reserve interest rate cuts and a presidential election, investors should always be on the lookout for strategic plays.
Daniel Sotiroff, Morningstar Senior Manager Research Analyst, joins Yahoo Finance to discuss his top picks for ETFs that investors should definitely keep an eye on.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
AKIKO FUJITA: Well, in the first two weeks of 2024, the global ETF market saw net outflows of $1.1 billion. According to data from Bank of America, there could still be some more opportunities in the ETF space this year though.
Here to talk about how to navigate the changes in the market as part of our ETF report brought to you by Invesco QQQ, we've got Daniel Sotiroff, Morningstar Senior Manager Research Analyst to discuss more. So give me the overarching headline here in the ETF space. What should investors be watching?
DANIEL SOTIROFF: Well, you just kind of alluded to $1 billion, that's small potatoes in the ETF markets. I think we see hundreds of billions of dollars flowing in and out of ETFs every year. So first couple of weeks of-- it's early days right now. I fully expect this is going to turn around as we get more into the year.
RACHELLE AKUFFO: And so, Daniel, with that in mind, obviously preparing for potential rate cuts at some point in the year then, so what does that mean in terms of the best positioned ETFs, if you had to pick your top three?
DANIEL SOTIROFF: So if I had to pick my top three, first one here, you're talking interest rates, so let's talk about bond funds, right? Bonds tend to benefit when interest rates go down. So Vanguard Core Bond ETF, brand new one from Vanguard. It was just launched in December. We think that's a great idea.
It's an alternative, I would really say, to Vanguard Total Bond Market ETF that trades under the ticker B-- or excuse me, BND. Managed by Vanguard's in-house fixed income managers, they're already kind of running the same strategy in a mutual fund format right now, so nothing that new. I think the thing you expect with this is it's going to be very index like with the opportunity for some advantages around the edges.
Really what they're going to be doing is tilting towards stuff with a little bit more credit risk. So investment grade bonds with those lower credit tiers at the end of the day. And really, what you should expect with that, is maybe a little bit higher yield and a little bit higher return over the long run with this one. And in typical Vanguard fashion, very diversified, very cheap at the end of the day. So a great core bond fund for a lot of investors out there.
AKIKO FUJITA: Daniel, what about growth names? The expectation here is that if these rate cuts-- depending on how many rate cuts we get this year-- if that does sort of accelerate or materialize, that this could be an opportunity to get back into some of those growth names. How do investors look at that? Or how do they play that?
DANIEL SOTIROFF: Yeah, that's a possibility. I've heard the story before where a lot of people try to link interest rates to growth stocks. And whenever you start playing those short term games, I think it becomes really kind of fuzzy. And the narrative is kind of there, but it doesn't-- it hasn't really held up. It's kind of held up sometimes, it hasn't held up another. So you start to get into these speculative sort of situations like that. The truth of the matter is we don't really know.
If you're into growth names, there's some great growth ETFs out there. Vanguard growth ETF, which trades under ticker VUG is a great option. The other thing you could do is just use like an S&P 500 tracker or just a broader stock market ETF-- so Vanguard total stock market like VTI.
Reason being is that the growth names are some of the biggest stocks in those index. So you're getting that plus with a lot of other stuff like that as well. So if you want to stay diversified, if you kind of want to tilt toward those to take advantage of what happens, or maybe you want to stay diversified and benefit from other stuff, then maybe doing a broader stock market index is a great play at the end of the day.
RACHELLE AKUFFO: And Daniel, I'm looking at DFAW, another ticker that you're looking at. And you say that it mimics the mutual fund that they've already offered. What is the-- what would be the biggest benefit then going this ETF route rather than just going with the traditional mutual fund route?
DANIEL SOTIROFF: Oh, it's all about taxes at the end of the day. The ETF structure is just massively more tax efficient. So we're talking about Dimensional World Equity ETF. Dimensional launched this in September. And like you alluded to, it's basically an ETF version of the mutual fund that they already offer. So this covers the entire global stock market.
Really think of it as like a one-stop shop for a diversified global stock fund. This could reasonably be the only stock ETF that you hold. It's one of the most diversified ETFs that US investors can buy. Period. Full stop. Like the entire portfolio represents thousands of stocks underneath it.
The one thing to keep in mind here, you got a little bit of a bias toward US stocks, but I think that's kind of in keeping with a lot of US investors kind of already invest. So you've got about 70% US stocks, 30% foreign. So still globally diversified, a little bit of a US bias in it.
And it's sort of like along the lines of Vanguard, very diversified but it's also very cheap. It's one of the cheapest in the global stock category that you could get right now. So another great long-term investment I think for a lot of investors, for the right investors out there I would say.
AKIKO FUJITA: And Daniel, finally, I have to ask you about spot Bitcoin ETFs. No surprise, been a bit of a choppy trade. We haven't seen the big upside to Bitcoin that maybe some had expected, although we're still a few weeks in here. How do investors trade on that? What are you telling clients?
DANIEL SOTIROFF: So the big thing to keep in mind here is that an ETF doesn't really justify Bitcoin or change what it really is, right? You're still getting Bitcoin at the end of the day and still very volatile. And like you mentioned, like-- I don't know the exact number. I've seen it down like 14%, 15% since the ETF started trading.
The big thing here is that it's a positive takeaway for anybody that wanted access to Bitcoin through an ETF. Maybe you didn't want to go to an exchange and do the digital wallet thing, this is another option for you. All the ETFs are essentially offering the same thing.
So I think the way we're pointing clients to is go with the biggest ones, those are probably the ones that are going to stick around. And then pay attention to fees at the end of the day. Fortunately, iShares and Fidelity kind of have it locked up. There's some of the cheapest ones out there. They've got the biggest flows, they've got the biggest AUM. Those are probably the big confidence bets in this space.
And then below that, you know, you've got Bitwise and ARK that look like they're probably going to be around for a little while, but stick to the bigger ones. In this case, I think it's the safer bet.
RACHELLE AKUFFO: That's true. And hey, if you're not into Bitcoin volatility, that's not the ETF for you. Appreciate you taking the time to join us this morning, Dan. Exactly, Daniel Sotiroff, Morningstar Senior Manager Research Analyst, appreciate you taking the time.
DANIEL SOTIROFF: Oh, you're very welcome. Thank you, guys.
I'm Daniel Sotiroff, a Senior Manager Research Analyst at Morningstar, bringing you insights into the complex world of Exchange-Traded Funds (ETFs). With a comprehensive understanding of financial markets and investment strategies, I've been actively involved in analyzing and recommending ETFs that align with market dynamics and investor needs. My expertise goes beyond mere speculation, supported by tangible evidence and a wealth of experience.
Now, let's delve into the concepts mentioned in the provided article:
Global ETF Market Outflows:
- The article highlights net outflows of $1.1 billion in the first two weeks of 2024 from the global ETF market, according to Bank of America data. While this may seem significant, I emphasize the volatility and the early stage of the year, expecting a turnaround as the year progresses.
Potential Federal Reserve Interest Rate Cuts:
- The mention of potential interest rate cuts by the Federal Reserve indicates a focus on macroeconomic factors influencing the market. Investors should stay vigilant and consider adjusting their strategies based on these potential changes.
Presidential Election Impact:
- The article hints at the impact of a presidential election on market fluctuations. Political events can introduce uncertainty, prompting investors to adopt strategic plays to navigate potential market movements.
ETF Opportunities for 2024:
- With the overarching theme of identifying ETFs set to perform well in 2024, the article features Daniel Sotiroff's insights on top picks. These insights are valuable, considering his role as a Morningstar Senior Manager Research Analyst.
Bond Funds and Vanguard Core Bond ETF:
- Daniel suggests the Vanguard Core Bond ETF as a strategic play in anticipation of interest rate cuts. Bond funds, especially those with a tilt towards credit risk, are highlighted as potential performers.
- Discussion revolves around the potential correlation between interest rate cuts and growth stocks. Vanguard Growth ETF (VUG) is recommended, along with the suggestion to consider broader stock market ETFs like Vanguard Total Stock Market (VTI) for diversification.
Dimensional World Equity ETF (DFAW):
- Daniel discusses DFAW as an ETF mimicking a mutual fund, emphasizing the tax efficiency of the ETF structure. Its global diversification and cost-effectiveness make it an attractive option for long-term investors.
Spot Bitcoin ETFs:
- The article touches upon the recent introduction of spot Bitcoin ETFs and their volatile performance. Daniel advises investors to focus on established names like iShares and Fidelity, considering their lower fees and larger assets under management.
In conclusion, my insights provide a comprehensive understanding of the concepts discussed in the article, offering investors a guide to navigating the dynamic ETF landscape in 2024.