Equity markets have been the story of 2024 as risk assets continue to deliver strong performance despite interest rates remaining at record levels.
Despite the strong performance, especially in US equities, overconcentration risk is a key theme across the majority of developed market indices.
How to position portfolios in this environment is a headache for fund selectors. De-risk portfolios too early and they risk missing out on returns, however, stay exposed to the 'magnificent seven' and returns could be wiped out.
In response, ETF Stream has asked five members of its ETF Buyers Club for their top ETF picks for H2.
Dan Caps, investment manager, Evelyn Partners
With the UK stockmarket having lagged its global peers, and a sectorial bias to a number of out-of-favour industries, the FTSE 100 is trading at an enticingly cheap multiple of 14x price-to-earnings, relative to nearly 24x for the MSCI World. If the large-cap space is looking cheap, the more domestically focused mid-caps are in the bargain bin.
Add to this a glut of investment trusts trading at deep discounts, from a valuation perspective there is a lot to like about the FTSE 250. With inflation back down to target, the Bank of England poised to cut rates and a new government with a focus on growth and infrastructure spend, there is a renewed optimism around the outlook for the UK economy. Now could well be the perfect opportunity to capitalise on this under-valued and unloved index.
ETF pick
Vanguard FTSE 250 UCITS ETF (VMID)
Andrew Limberis, investment director, Omba Advisory & Investments
Tactically, the equal-weight S&P 500 index offers a good balance of maintaining US exposure but also positioning for a broadening of market performance. Relative performance has been poor since gaining much popularity a year ago only to be overtaken by AI enthusiasm. With numerous false starts and divisive opinions, the swift reversal in mid-July shows how quickly this can turn.
Maintaining a US bias running into the election, which may prove to be quite protectionist (about 70% of revenue been generated in the US for the equal weight index), it offers a good balance between domestic smaller caps and the S&P 500. The upcoming rate-cutting cycle, fair valuations and stronger diversification (but still within very large and profitable businesses) may prove positive for the equal-weight S&P 500 index.
ETF pick
Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW)
Simon McConnell, head of portfolio construction, Netwealth
It is well-known that UK domestic stocks appear cheap, but we think there are a number of catalysts for their resurgence including:
Political stability
The potential for policy shifts encouraging domestic market ownership
An increasing number of acquisitions from international firms, which give evidence of the UK discount
Positive real wage growth within the economy, supporting revenues
The likelihood of looser monetary policy
We think the best way to implement exposure to UK domestic stocks is through the Amundi Prime UK Mid & Small Cap UCITS ETF (PRUK). This is highly correlated to the FTSE 250, but strips out the global investment trusts that do not manifest the desired investment theme. Plus, it also offers the cheapest exposure in the sector at 0.05%.
ETF pick
Amundi Prime UK Mid and Small Cap UCITS ETF (PRUK)
Tom McGoldrick, fund manager, AJ Bell
My pick for H2 2024 is the iShares Automation & Robotics UCITS ETF (RBOT). This is an ETF with a focus on investing in companies that derive a significant amount of revenue from sectors linked to the theme of automation and robotics, which is a key part of the ‘AI’ megatrend. Investing in innovative and growing companies at the forefront of this theme means investors should benefit from higher growth and reduced cyclicality.
The fund operates an equal-weight methodology, reducing the concentration risk which faces other ETFs while employing a cut-off to ensure the fund does not become too heavily stacked with illiquid constituents.
This could be a good pick for investors who are looking to capture the continuing AI megatrend but are wary of idiosyncratic risks in individual companies.
ETF pick
iShares Automation & Robotics UCITS ETF (RBOT)
Hoshang Daroga, investment director, Elston Consulting
Over the last 12 months, the rally in US equities has mainly been driven by a handful of stocks, colloquially dubbed the ‘magnificent seven’, increasing their share in the S&P 500 and leading to concentration risk. However, most of the rally is justified as these stocks have delivered exceptional earnings growth with increasing profit margins compared to the rest of the market. We see concentration risk as a choice, not an obligation.
With the US economy continuing to show resilience and inflation moderating, we see the earnings growth gap between large-cap tech and rest of the market closing. One of our themes for H2 2024 has been broadening of the rally and the simplest way of getting exposure to this theme is via the equal-weight S&P 500 index. A few ETFs track this index but the largest one by far remains the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW).
ETF pick
