Image Source: Unsplash
 

After several twists and turns, Wall Street is on a blistering rally to end 2023. The three major indices have hit new highs on several occasions, buoyed by the tech surge, cooling inflation, and the optimism that the Fed is done with interest rate hikes. The Nasdaq Composite Index is the outperformer, gaining 41.2%. Meanwhile, the S&P 500 and Dow Jones Industrial have risen 22.4% and 11.9%, respectively.

Below, we discuss some of the hot events of 2023 that influenced the market in a big way:
 

Technology Wave

Technology is the best-performing sector of 2023, driven by the artificial intelligence (AI) boom and a crypto rally. ROBO Global Artificial Intelligence ETF (THNQ - Free Report) and Valkyrie Bitcoin Miners ETF (WGMI - Free Report) emerged as the biggest winners in their respective spaces, rising 57.5% and 257.3%, respectively.

The craze for AI has also magnified the returns of the “Magnificent Seven” stocks, driving the appeal for The Magnificent Seven ETF (MAGS - Free Report). This fund offers investors precise exposure to the “Magnificent Seven.”

The world's largest cryptocurrency started 2023 just above $16,000 and climbed to a 12-month high of $45,000 in early December. The rally came on the back of broad enthusiasm about U.S. interest rate cuts and the imminent regulatory approval for Bitcoin ETFs. Bitcoin's performance in 2023 has outpaced other assets like global stocks and gold.

Additionally, bets that the Fed’s aggressive interest rate hiking campaign might be nearing an end have powered the rally in recent months. The trend is likely to continue in 2024.
 

Monetary Policy Shift

In the latest meeting, Federal Reserve Chair Jerome Powell hinted at a major policy shift as inflation is easing and the economy is holding up better. He signaled three rate cuts for the next year, compared with the previous forecast of two rate cuts in 2024. The federal funds rate is expected to be in the range of 4.4-4.9%, down from the current 5.25% to 5.50%. This indicates that the Fed will cut rates by a total of 0.75% next year, indicating that the historic rate-hiking campaign might be ending.

Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. This can positively impact sectors like real estate, consumer discretionary, and financial services, which are typically sensitive to interest rate changes. In real estate, for instance, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can compress net interest margins for banks, they can also encourage lending and potentially lead to increased consumer and business loan activity.

As a result, Vanguard Real Estate ETF (VNQ - Free Report), Utilities Select Sector SPDR (XLU - Free Report), iShares U.S. Home Construction ETF (ITB - Free Report), and Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) are set to gain in 2024.
 

Rise of Single-Stock ETFs

Single-stock ETFs have gained immense popularity this year amid the surging stock market and the big tech wave. Unlike traditional ETFs, which typically track a broad index or sector, single-stock ETFs provide exposure to the performance of one specific company by using derivatives. This allows investors to gain exposure to a particular stock without having to buy the stock directly.

There are currently 45 leveraged and inverse US single-stock ETFs on the market with a combined $3.3 billion in assets, according to Morningstar data. Five firms, AXS, Direxion, YieldMax, GraniteShares, and Innovator, provide all the single-stock ETFs currently available on the market.

Direxion Daily TSLA Bull 1.5X Shares TSLL is by far the largest U.S.-listed single-stock ETF on the market. It offers 1.5 times (150%) the daily percentage change of the common stock of Tesla (TSLA - Free Report). In terms of 2024 performance, GraniteShares 1.5x Long COIN Daily ETF CONL, GraniteShares 1.5x Long NVDA Daily ETF NVDL, and GraniteShares 1.5x Long Meta Daily ETF FBL are the biggest beneficiaries, gaining about 570%, 411%, and 334%, respectively.

CONL seeks 1.5 times (150%) the daily percentage change of the common stock of Coinbase Global Inc (COIN - Free Report) , NVDL offers 1.5 times exposure the stock of NVIDIA (NVDA - Free Report) and FBL tracks 1.5 times the performance of the stock of Meta Platforms (META - Free Report) .
 

Mutual Funds Converting to ETFs

The trend of converting mutual funds to ETFs gained momentum in 2023, reflecting a significant shift in the investment landscape. About three dozen ETF conversions took place this year driven by several factors, including lower costs, better liquidity, and increased transparency associated with ETFs compared to mutual funds. ETFs also offer significant improvements in tax efficiency, as they use in-kind redemptions to avoid triggering capital gains taxes, which is not the case with mutual funds.

One of the most notable conversions in 2023 was by Fidelity Investments, which converted six actively managed mutual funds into ETFs in November. These funds collectively manage assets worth roughly $13 billion. These include Fidelity Enhanced Large Cap Core ETF FELC, Fidelity Enhanced Larg Cap Growth ETF FELG, Fidelity Enhanced Large Cap Value ETF FELV, Fidelity Enhanced Mid Cap ETF FMDE, Fidelity Enhanced Small Cap ETF FESM and Fidelity Enhanced International ETF FENI.

Overall, the shift from mutual funds to ETFs has affected nearly $100 billion in assets. This trend aligns with broader investment patterns. While mutual funds have experienced net outflows, ETFs absorbed about $194 billion in 2023. More conversions are expected to come in 2024, especially by actively managed and higher-fee mutual funds.
 

Covered Call ETFs Gain Popularity

In the quest for higher yields amid increased volatility in the stock market, investors flocked to ETFs utilizing covered-call strategies, resulting in a notable uptick in fund inflows. Covered-call ETFs saw a surge of interest in 2023, attracting investors with the promise of hefty yields alongside shelter from market turbulence. These ETFs, by employing options strategies known as writing covered calls, provide exposure to the stock market with lower volatility compared to the overall market.

In this category, JPMorgan Equity Premium Income ETF (JEPI - Free Report) and JPMorgan Nasdaq Equity Premium Income ETF JEPQ were the most popular, having pulled in $12.9 billion and $6.5 billion, respectively, in new money this year.

More By This Author: