These ETFs Face Headwinds in 2024

As markets head into 2024, more than a bit of uncertainty surrounds the path of least resistance for asset prices. Markets reflect economic and geopolitical landscapes, which collectively represent a hornet’s nest of problems that could cause sudden bouts of extreme volatility.

On the economic front, the U.S. debt, political divisiveness, the upcoming primary season and the November 2024 election could dramatically impact markets. Geopolitically, wars in Ukraine and the Middle East, along with the bifurcation of the world’s nuclear powers, affect trade and threaten world peace.

Meanwhile, we have learned that the most significant price variance occurs when unexpected events transpire. The 2008 global economic meltdown and housing crisis came with little warning, as did the 2020 worldwide pandemic and Russia’s 2022 Ukraine invasion. At the end of 2007, 2019, and 2021, few analysts forecasted anything like these events. Shocks and surprises tend to cause the most significant price action.

Take Caution With These ETFs in 2024

The current environment has market participants prepared for lots of action, yet little could in fact occur. A contrasting pair of sayings – “Buy the rumor, sell the news,” or “Sell the rumor, buy the news” – may prove prophetic for the coming year. With volatility expectations high, low price variance could prevail. Markets tend to move when participants are overly long or short. A cautious approach to 2024 could bypass significant price moves as risk taking declines.

I see three ETF products that could struggle in 2024. The Invesco DB U.S. Dollar Index Bullish Fund (UUP) could fall if the dollar loses its footing as the world’s reserve currency. The Global Autonomous & Electric Vehicles ETF (DRIV) could lag the market as the 2024 U.S. election determines the future of climate change initiatives.

Finally – as it takes U.S. monetary policy months if not years, to filter through the economy – the recently high-flying iShares Russell 2000 ETF (IWM) could deliver sub-par results as the current interest rate environment does not favor small-cap companies that require financing for growth.

UUP: The Case Against the U.S. Dollar 

On Dec. 13, the U.S. Federal Reserve shifted from hawkish to dovish monetary policy. It left the short-term Fed Funds Rate unchanged and forecasted rate cuts for 2024. Since interest rate differentials are critical to a smooth path vis-à-vis one reserve currency versus another, the dollar index fell below the 103 level that day. Meanwhile, the index reached its most recent high above 107 in October 2023. when interest rates soared as the long bond futures fell to the lowest level since 2007. Falling rates could weigh on the dollar index in 2024.

At $27.34 as of Dec. 20, UUP has about $501 million in assets under management. UUP trades an average of more than two million shares daily and charges a 0.78% management fee. UUP tracks the U.S. dollar index higher and lower. The dollar index and UUP have declined since the October 2023 high.

Source: etf.com 

The etf.com Fund Flows tool shows more than $13 million has flowed out of UUP in Q4 as the dollar index and UUP declined. Meanwhile, the rising odds of a BRICS currency (Brazil, Russia, India, China, and South Africa) challenging the dollar and other world reserve currencies could cause further dollar declines in the coming year.  

DRIV: Climate Change on 2024 U.S. Ballot 

Climate change will be on the ballot in 2024 as Americans go to the polls to elect the next leader of the free world. The current administration supports addressing climate change by encouraging alternative and renewable energy while cutting back on fossil fuels. EVs are critical to maintaining the current energy path. A change in administration could pressure the autonomous and electric vehicles sector and thus impact DRIV’s components.

DRIV rose to a high of $32.11 in November 2021, fell to $19.39 in October 2022, and recovered to a lower high. At $24.21 per share on Dec.20, DRIV has jumped 21.5% in 2023. DRIV owns the leading technology and automobile manufacturing companies, with more than 3% exposure to Tesla (TSLA).

Source: etf.com 

The etf.com Fund Flows Tool highlights an outflow of more than $49 million from DRIV in Q4 2023. As of Dec. 20, DRIV had about $720 million in assets under management. DRIV trades an average of roughly 131,000 shares daily and charges a 0.68% management fee.  

Following the fund flows could mean investors have soured on DRIV as the uncertainty of the 2024 election – one that determines the future U.S. energy policy -- will soon take center stage.  

IWM: Higher for Longer May Hit Small Caps 

The SPDR S&P 500 ETF Trust (SPY), which tracks the diversified S&P 500 index, was 23% higher than the 2022 closing level. The tech-heavy Invesco QQQ Trust (QQQ) was more than 53% higher, and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rallied more than 13%.  

IWM, which tracks the small-cap Russell 2000, rose 12.6%. Higher rates had weighed on small-cap stocks, which could continue in 2024 if the Fed does not accelerate rate cuts. Moreover, factors that could encourage the central bank to cut rates sooner are negative for stocks – and small caps tend to underperform the S&P 500 during downturns.  

At $196.28 as of Dec. 20, IWM has rallied 21% this year and from its Oct. 27 low of $162.21 but could run out of upside steam in 2024. The bullish trend encouraged buying over the past months; IWM is highly liquid with about $62 billion in assets. IWM trades an average of more than over 39.5 million shares daily and charges a 0.19% expense ratio.  

Source: etf.com 

The chart shows more than $2.6 billion flowed into IWM in Q4. However, profit taking and shifting to large-cap stocks as rates decline could cause IWM to underperform versus other leading stock market indices. Moreover, as rate hikes filter through the economy, the lagged impact could affect emerging companies that most need financing. Cash-rich large-cap stocks can be less rate-sensitive.

Advice on Avoiding Losses in 2024 

The four most significant factors to consider for preventing losses are: 

• Always remember a risk position is long or short at the current market price, not the original execution price.
• Adjust risk-reward profiles of all investment or trading positions according to the current price level.
• Always have a plan and stick to it.
• Intellectual honesty involves questioning the original thesis of an investment or trade to ensure it has not changed because of price or other market dynamics.

Auditing your portfolio periodically will protect capital and enhance profitability. While dynamic market participants constantly question their risk profiles, passive investors must review allocations and investments to ensure they fit desired goals.

Next Week: The Best Bets for the Coming Year 

Next week, I will look at the best bets for 2024. Markets reflect the economic and geopolitical landscapes, which remain rife with risks in late 2023 and set the stage for the year ahead.