David Stevenson, founder and strategic adviser at ETF Stream, has assessed opportunities and challenges in 2024, ranging from the fixed income revival to active manager underperformance and the ‘acute’ need to diversify amid US large cap dominance.
He said the emphasis on the word diversification is “becoming ever more acute”, with the US comprising 70.1% of the MSCI World and the ‘magnificent seven’ alone claiming a 19.2% stake of the global benchmark which captures over 1500 equities.
Stevenson noted US large cap tech, consumer and communications names have done “terribly well” and he “would not want to bet against them”; however, he urged investors to consider other factors, themes, sizes and risk factors.
“We have had an amazing run of outperformance by US large cap equities but logic just simply suggests mean reversion,” he continued. “At some point, they will underperform and something else will outperform.”
Outside of equities, he noted central bank policy rates have “likely peaked” and some may start cutting rates at different paces in 2024.
While stating such a backdrop would benefit government bond ETFs, he warned this may not translate evenly across fixed income.
“One of the reasons why interest rates are probably coming down is because central bankers are worried about going into a recession,” he continued. “That usually means that the defaults on corporate bonds go up – and they already are.”
Finally, Stevenson also noted “tailwinds remain” for further ETF adoption in Europe, with greater focus on costs, continued fund manager underperformance and a generational shift in investing culture leading the way.
“As the twenty-somethings turn into thirty-somethings and then turn into forty-somethings, they have grown up in a culture where there is less adulation for active fund managers. That favours ETFs enormously.”
Despite this shift, Stevenson said he expects alternative, increasingly granular and even active management to be key components of future product development within ETFs.