Top ETF trends heading into 2024

With the Federal Reserve signaling rate cuts in 2024, a potential Santa Claus rally on tap, tax-loss harvesting activity, and positioning for the new year, there is a lot of money moving around the market right now. Some of that money is going into ETFs, with a space that has seen inflows surge recently.

ETF Think Tank Director of Research Cinthia Murphy joins Yahoo Finance Live to explain some of the trends driving money into ETFs. Some of the trends she is seeing are investors "looking for a little quality, look for economic moat" and "things like your free cash flow companies, your cash cows, or shareholder yield ETFs."

Watch the video above hear which ETFs Murphy says are benefiting from these trends.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: Well, let's take a look at what we're seeing with markets. All three averages in the green this morning. Now, the S&P 500 just shy of that record set in January of last year, increasing inflows into ETFs helping fuel the most recent rally.

According to Morningstar Direct, more than 70 mutual funds have converted to ETFs since early 2021 and three dozen of those have happened in 2023 alone. SPDR, S&P 500 ETF has seen the biggest inflows, raking in $20.8 billion, the largest amount since the fund began in 1993 according to Bloomberg Intelligence. To discuss how investors should position themselves going into 2024, let's bring in Cinthia Murphy, ETF Think Tank director of research. She joins us as part of our ETF report brought to you by Invesco QQQ.

Thank you for joining us this morning. So we know a lot of people had some of this cash on the sidelines that they had then put into mutual funds. But then seeing them convert it into ETFs, what do people need to know going into the end of this year and heading into 2024 about how to play this smartly?

CINTHIA MURPHY: Yeah. Hi, it's been a crazy month so far this year. I mean, as you pointed out, the amount of money going into a fund like SPY, the S&P 500 ETF, and some of these large-cap equity ETFs has been massive. I mean I think SPY took in something like $35 billion in the last week alone. So there's been a lot of positioning going into 2024.

Now, what's important to remember here is a couple of things. In December, we tend to see big flows into ETFs anyway traditionally. Not only there's a seasonality to the market where US equities tend to perform well in December, I saw a statistic recently that said 70% of the time the Dow Jones industrial average is up in December regardless of the market environment. So it's a good time for US equities in general.

But then with the Fed messaging suggesting rate cuts next year, it just ignited this enthusiasm for US equities going into 2024. And we've seen a lot of money flow into your classic large cap plays. Big tech remains in favor. All these things that we thought were on the line of fire if that higher for longer tone would come out of the Fed all of a sudden have this new momentum because there's this expectation that rate cuts will come next year.

And then you have a lot of, you know, at this time of year, there's a lot of tax loss harvesting, things that contribute money to ETFs. Positioning ahead of next year, we've seen a lot of money come out of active mutual funds in 2023 again. If you remember in 2022, we saw $1 trillion leave active mutual funds. Some of that money continues to pour into the ETF space. So it's just all these trends really supporting flows into US-listed ETFs, especially in the equity space.

AKIKO FUJITA: So Cinthia, let's break that down. I mean, more inflows coming back into high-growth names, how do you play that in the ETF space? What are some ones that investors should be keeping an eye on?

CINTHIA MURPHY: What's interesting about that is that there's two lines of thought there. One is this space, that high growth, the big tech, the Magnificent Seven as they like to say, these are all overbought. These are highly valued. These are positions that are likely to correct.

The other train of thought is 2024 still looks like a risky year. There's a lot of people concerned about a recession still. There's a lot of people concerned about downside given how much the market has run against all odds. So there's a call for quality, focus in setting companies, high quality companies.

Well, some of these high big tech names are actually high quality names. So you're caught between that you keep buying these high-value businesses and you take heed of the call for quality, which also lends you in some of these names or you diversify away from them. And that's a decision investors have to make.

If you look at a fund like QAL, Q-A-L, it's taken more than $15 billion of assets already this year. This kind of positioning of looking for a little bit of quality, look for economic moat, so a fund like [? MOAT. ?] And we also see, like, one of the classic plays for people who are worried about things not going perfectly right next year are things like your free cash flow companies, your cash cows, or Shareholder Yield ETFs, SYLD, high-dividend ETFs. Those are all names that people tend to look for when they're looking for that quality, but they're trying to move away a little bit from that big focus in tech. And we're seeing some of that money chase that.

RACHELLE AKUFFO: And so, Cinthia, for people who have, sort of, feel like they've missed the rally at this point, how should they be approaching this through ETFs? You've seen obviously small caps also rallying as well towards the end of the year.

CINTHIA MURPHY: Yeah, Black Rock had an interesting data point a couple of months ago that talked about in 2023, we saw more than $1 trillion go into, like, money-market-like, cash-like positions, meaning money in the sidelines. And the expectation is a lot of this money is going to be redeployed into 2024. So it's exactly this moment of where do I put that money to work. We're seeing a lot of it is going into your core, large cap, all-market type of place. Not really looking to be too tactical with it if you've been on the sidelines.

The small cap is an interesting story because small caps are very, very sensitive to the rate environment. They're very sensitive to access to capital. So there have been a spot that people have been watching for signal on what comes next. When small caps get in trouble, it suggests the economy may not be doing so well and markets may be in trouble ahead.

And so they're a good barometer for what happens next. And we've seen the momentum in small caps change over the last month. So it's a spot I would watch carefully if you're not playing in the market yet.

But what we're seeing-- the preferred method has been for people to just go into your QQQs, your SPYs, a fund that's been really interesting if you're worried about concentration. Equal-weighted approaches like RSP has been a phenomenal fund. It's performed really well.

And it's your S&P 500 stocks, but they're equally distributed. So you're not so much concentrated on your Mag-7. You're not so much concentration risk at the top of the portfolio. So you can dilute a little bit of that core equity exposure with different approaches to the same type of basket of stocks.

AKIKO FUJITA: Great. Cinthia Murphy, ETF Think Tank director of research, appreciate your time today.

CINTHIA MURPHY: Thanks for having me.