Major AI themes for ETF investing in 2024

Wed, Dec 27, 2023, 9:56 AM

O'Hara suggests investors opt into diversifying portfolios through equal-weighted versions of holdings. With AI revolutionizing markets, O'Hara says "we are in the midst of a technological revolution" as AI "eats up so much data." However, he advises "a diversified approach" when investing in AI, including both key tech players and the chipmakers "that do all the computing work."

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Video Transcript

[AUDIO LOGO]

RACHELLE AKUFFO: Investors looking to manage volatility and diversify their portfolios often turn to ETFs. And I found that these themes dominated ETF trading in 2023. Discretionary spending saw overall high performance persist, with e-commerce growing its market share. There was a shift in strength to on-demand cloud-based entertainment, while the rise of EVs remains fragile, with eyes moving towards other autonomous tech.

And crypto ETFs saw a resurgence of interest in the possible launch of a spot Bitcoin ETF. But will these themes remain as prevalent in the new year. As part of our ETF report brought to you by Invesco Q-Q-Q. Let's bring in Sean O'Hara, Pacer ETFs president, to discuss more about what to expect in 2024. Thank you for joining us this morning.

SEAN O'HARA: Thanks for having me.

RACHELLE AKUFFO: As we look at things like-- you're very welcome. As we look at how the Magnificent Seven has really pushed this rally and people trying to find their way in, what are the expectations for how to play this with ETFs in the new year?

SEAN O'HARA: Well, I think this is kind of a unique year when you think about it. Seven stocks control basically 100% or so of the return of the broad indexes. And so that's something that happens from time to time. We do get these markets where there's an over-concentration in a small number of names, but it never lasts.

And so I think as you start to think about next year, finding different ways to weight portfolios, like for example, if you are an S&P 500 investor, there's an equal-weighted version of the S&P 500. I think the ticker is RSP. Or you can buy an equal-weighted version of the NASDAQ 100.

And the idea behind that is that there's only really two ways for this to play itself out, and that is these big seven names come back down to Earth. And so if you stayed in the regular S&P 500, you'd get hurt more by that, versus broadening out and going equal-weight.

And then the second piece of it is if we have the bottom names coming back up, there's not enough weight in these indexes for it to make that much of a difference. So an equal-weight approach would do well in that environment as well. Or you could look for other fundamentally weighted type of strategies, things that look at earnings or revenue. Or like what we do at Pacer, we use free cash flow and free cash flow yield to screen for stocks.

DIANE KING HALL: Sean, when you think about AI, it's been a dominant theme this year. We talk about the Magnificent Seven and how much that's factor in terms of how investors have played this market and how that's really been the winner. How do you invest in the ETF space to take advantage of the AI play in 2024?

SEAN O'HARA: Well, we have an ETF that tickers TRFK traffic. And so the idea was sort of evolve free AI being the top story. We just believed we were in the midst of a technological revolution here. And so when you think about what makes that possible, whether it's streaming or the cloud or artificial intelligence is the big play because it just eats up so much data.

We basically took the guts out of the data centers and said, if you're going to own the component parts that are inside these buildings that do all of the computing work, and you were to figure out how to put a bunch of those names together, and that's where the idea behind traffic came from.

So we own all the big AI names. We own NVIDIA, Snowflake, Palo Alto, Intel, but it's a little bit more diversified approach. And so I think AI is going to continue to be a big story as companies try to figure out how they're going to monetize it or benefit from it. But in the meantime, the folks that I think will continue to make the money will be the chip makers and those people who provide sort of the nuts and bolts that go into the servers that power this whole thing.

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Major AI themes for ETF investing in 2024

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