Highlights From the Midyear Market Outlook Symposium

There are two things investors should really pay attention to, according to Scott Helfstein, head of investment strategy for Global X ETFs.

“It is capital expenditure first and foremost, and then that drives higher than expected nominal GDP growth,” he said.

While the market has seen a bit of a slowdown in the past year, there were 10 straight quarters of 10% of better capital investment leading up to last year. That had never happened before.

Helstein acknowledged the community has been wrong about GDP forecasts a lot. However, the error in the forecast has not been the consumer. “Consumer forecasts have been pretty good,” he said. “So we’re expecting to see a recovery back to those double digit numbers. We actually think that we could come in with growth that is above expectations. We’re really excited about that.”

Fears of a recession are still top of mind for many advisors. However, instead of preparing for a recession or economic deceleration, Helfstein said the community may want to start to embrace midcycle expansion.

A current opportunity for investors is in the automation and digitalization boom. This is an opportunity far larger than just AI. A fund that capitalizes on this is the Global X Artificial Intelligence & Technology ETF (AIQ A).

“It’s about taking things that we had to do in a cost-intensive and labor-intensive way, and making it easier to use,” Helfstein said.

The AI opportunity could be $16 trillion in global cost savings. If just 10% of that were achieved, that would be enough to raise profit margins by around 10% on the S&P 500, according to Helfstein.

This will require significant spending on infrastructure. And that could propel the Global X US Infrastructure Development ETF (PAVE B).

William Belden, president of Amplify ETFs, said the first half in some ways has been a continuation of 2023. The “Magnificent Seven” continues to drive equity markets higher. But there have been other contributors this year.

These contributors include the advent of the U.S. spot bitcoin ETFs, which has driven crypto higher, as well as a rally in precious metals commodities. Additionally, the strength within the GLP-1 pharma space is an emerging trend (investors can get exposure with the Amplify Weight Loss Drug & Treatment ETF (THNR B-).

Looking to the second half of the year, Belden expects market performance will be influenced by the election. In addition, volatility could rise. It has been relatively muted so far in 2024.

Covered call ETFs may be well-positioned in the current environment. These funds could potentially augment income-generating potential and at the same time dampen equity volatility. The funds do this by layering dividend paying equities and call writing.

The Amplify CWP Enhanced Dividend Income ETF (DIVO A-) and the Amplify CWP International Enhanced Dividend Income ETF (IDVO ) are two covered call strategies for investors to consider. DIVO was among the first covered call ETFs available to investors, with IDVO launching in 2022.

Finally, the Amplify Transformational Data Sharing ETF (BLOK A) has caught a nice tailwind in 2024, Belden said. Launched in 2018, BLOK was the first fund of its kind available to investors.

The ETF does have some direct exposure to spot bitcoin. However, the active ETF focuses exposure to the companies poised to benefit from increasing adoption of blockchain technology.

BLOK holds a wide variety of companies. These include small, emerging companies as well as large and well-established companies.

The fixed income market offered many surprises for investors and policymakers during the first half of the year. That’s because inflation remained above target.

Despite the rally in long rates in June, long-dated fixed income asset classes still underperformed during the first half. This includes long-dated Treasuries, broad U.S. corporate index, and the U.S. aggregate index.

On the other hand, it has also been a very resilient economic environment, according to JoAnne Bianco, investment strategist at BondBloxx.

“That’s benefited corporate credit and supported fixed income asset classes like U.S. high yield and short-dated BBB corporates,” she said. “Investing in higher spread products like high yield and short-dated BBBs has been a winning strategy in fixed income for the past few years now.”

In terms of rate cuts, it’s unlikely to expect anything before the election in November. That’s according to Dominic Nolan, CEO of Aristotle Pacific Capital and Aristotle Investment Services, the advisor to Aristotle Funds. That said, he would be surprised if there are no cuts. Nolan thinks one to two cuts is likely but underscored that things can change.

Bianco said she was not surprised rate cuts were pushed out to later in 2024. “We see no compelling reason at this point for multiple rate cuts by the Fed this year. So, one to two at most,” she added.

As for capturing current opportunities, Bianco said Bondbloxx still really likes corporate bonds. This is in addition to both segments of the U.S. high yield bond market, and especially short- to intermediate-term BBB bonds.

This includes ETFs such as the BondBloxx BBB Rated 1-5 Year Corporate Bond ETF (BBBS ) and the BondBloxx CCC-Rated USD High Yield Corporate Bond ETF (XCCC ). The BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF ) is also attractive in the current environment.

Nolan said his firm has been constructive on the high yield credit space. With the slowdown in the economy, investment-grade credit is becoming more and more compelling. An underappreciated asset class in credit is floating rate loans, however.

Floating rate has outperformed fixed rate bonds by a substantial amount over the past two years. Yet investors are largely taking money out of floating rate.

“So you have an asset class [where] spreads are attractive, the curve is in their favor, and the strength of the economy is in their favor,” Nolan said. “That’s an area we remain constructive on as long as the curve is where it sits and the economy is fine.”

Funds in Aristotle’s lineup that are compelling in the current environment include the Aristotle Core Income Fund PLIDX, the Aristotle Strategic Income Fund PLSFX, and the Aristotle Floating Rate Income Fund PLFDX.

AI is still a new concept for most people, but it has actually been around for longer than many realize.

Machine learning has been around for over a decade. However, the industry has recently reached an inflection point with ChatGPT and large language models, according to Zeno Mercer, senior research analyst at VettaFi.

“What we’ve really seen is kind of an evolution here and major upgrade. Obviously, there’s been advancements in chips, data centers, and the way we’ve communicated and collected knowledge,” he explained.

Product development designs, advertising, recommendation engines, and financial services have used AI for a long time now. However, they’re still uncovered opportunities. This includes domains such as energy and healthcare.

The ROBO Global Artificial Intelligence ETF (THNQ B-) is a fund providing exposure to the industry. The fund looks for the technical leaders that are prime positioning for each component of the body of artificial intelligence, Mercer said.

The rise of AI will lead to increased energy draw and power grid strain. A lot of data centers aim to be net zero. However, they will need to use other sources of energy such as natural gas, according to Mercer.

“There’s a lot of interest in companies trying to source renewable power as they’re trying to meet incremental power demand. We think it’s going to be hard to meet all that demand with renewables,” said Stacey Morris, head of energy research at VettaFi. “Even when you deploy more solar and more wind, you typically are going to need more natural gas capacity to go with it just to act as a backup, and to address essentially the intermittency of renewables.”

For investors who want to capitalize on the increased energy demand, Morris said she would give some caution about playing it through natural gas prices.

“Natural gas prices can be pretty volatile. A lot depends on what’s happening with the weather. It may be difficult to play a long-term trend using the commodity itself,” she noted.

With that in mind, investors might look to a broad energy ETF. However, that will provide a good amount of exposure to oil prices, which may dilute the exposure to natural gas prices, according to Morris.

“Then investors might think about looking at natural gas producers. And then they’re in a situation where they need to be essentially stock picking and making sure that they’re picking the best natural gas producer,” she said.

With all that context, there may be strengths in playing it through the midstream space.

“These companies are essentially providing the shipping and handling function of the energy value chain. They’re providing services for a fee, and they provide less exposure to the underlying commodity price,” Morris said. “There’s a lot of touch points along the way where they can collect fees. They’re moving natural gas from the production well to a processing facility. They’re processing natural gas into usable form, removing impurities, getting into pipeline quality grade. And then they’re moving it through a larger pipeline to demand centers.”

“There’s a lot of opportunities as you see growing natural gas production and growing natural gas demand,” Morris added. “So I think [midstream] is potentially an interesting way for investors to play this theme.”

The Alerian Energy Infrastructure ETF (ENFR ) offers exposure to what’s going on with natural gas and certainly would have leverage to the growth in natural gas pipelines, as well as the growth in both natural gas supply and demand.

To watch the full symposium and receive CE credits, register for the replay here.

VettaFi LLC (“VettaFi”) is the index provider for ENFR and THNQ, for which it receives an index licensing fee. However, ENFR and THNQ are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of ENFR and THNQ.

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