ETF Stream’s portfolio more than doubles benchmark return in 2024

As 2024 draws to a close, a year of narrow equity market leadership, interest rate cuts and a Donald Trump election victory saw the ETF Stream editorial team’s ETF portfolio more than double the gains of its 60/40 benchmark.

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While not all predictions materialised, key base cases – namely continued US equity dominance and neutralising yen exposure in Japanese equities – bore fruit, alongside satellite allocations to onshore Chinese equities and US small and mid-caps.

In fact, while our global 60/40 benchmark portfolio – comprised of the iShares MSCI ACWI UCITS ETF (SSAC) and the iShares Core Global Aggregate Bond UCITS ETF (AGGG) – returned 5.5% through the year as at 18 December, ETF Stream’s 2024 portfolio booked respectable gains of 12.3%, according to data from ETFbook.

Continued bright spots

Leading in returns were some of the same ETFs as at the end of H1, including our joint-largest position at 20% – the JPM US Research Enhanced Index Equity (ESG) UCITS ETF (JURE) – which booked strong full-year performance of 29.5% as at 18 December.

Impressively, JURE’s low tracking difference active approach, which applies over and underweights to S&P 500 constituents based on valuation and forward-looking earnings metrics, saw the ETF extend its lead over the S&P 500 index to 200 basis points (bps) through the year.

The ETF has become a favourite among European investors, booking $5.7bn inflows in the year-to-date to 17 December, marking the first time an active ETF has broken into the continent’s top 10 highest inflowing ETFs for the year.

Our third-largest equity allocation at 7% – the UBS ETF MSCI Japan UCITS ETF (hedged to GBP) (UB0D) – also continued its stellar form to finish the year with gains of 17.9%.

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Fund selectors continued to favour Nipponese equities following reforms to corporate reporting standards, however, there were concerns the start of the Bank of Japan’s first rate hiking cycle in 17 years could hamper manufacturing activity and reduce the attractiveness of neutralising yen exposure. Thankfully, these concerns did not materialise within the 12-month timeframe.

Notable winners

Elsewhere, other equity allocations which fell flat through H1 found support in the latter stages of the year.

With Federal Reserve rate cuts reducing the cost of refinancing and a Trump election victory spurring hopes of tax cuts, indebted companies came back into favour, allowing the much prophesied ‘broadening out’ of US equity gains to play out.

This saw our 20% position in the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW) go from single digit gains in H1 to a 16.2% return at year-end, while our 4% allocation to the SPDR Russell 2000 US Small Cap UCITS ETF (RTWO) added 18.5%.

Another worthy mention is our 3% allocation to the Invesco S&P China A 300 Swap UCITS ETF (CA3S), which turned a 2.2% gain into a 17% bounce for the full year after Sino policymakers announced their most broad-ranging stimulus since the Global Financial Crisis (GFC) in October.

In fixed income, highlights were seen in shorter maturity exposures such as our 10% position in the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) gaining 5%, with lower rate sensitivity and yields remaining elevated.

Our 4% allocation to the iShares Core € Corp Bond UCITS ETF (IEAA) booked 5.2% returns. IEAC is particularly noteworthy for having an average duration of 5.07 years, versus 13.15 years for the iShares $ Corp Bond UCITS ETF (LQDE).

The detractors

While US smaller company and Sino equity surges shortened our list of setbacks since H1, Fed Chair Jerome Powell’s reluctance to do away with hawkish messaging weighed on the particularly rate sensitive elements of our portfolio.

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After rising steadily through until the end of Q3, our 10% allocation to the iShares $ Treasury Bond 20+yr UCITS ETF (DTLA) collapsed 13% from its high during the year to finished 2024 down 4.5%.

This followed a positive period of Fed rate cuts being priced in by the market, only for Powell to emphasise the rate of cuts will slow in the coming year to prevent a resurgence in inflation.

That messaging from the Fed chair also sent yields on 10-year UK gilts to their highest level since October 2023. The Bank of England may opt to take a similarly moderated approach with recent wage data causing BoE Governor Andrew Bailey’s team to be similarly mindful of catalysing an inflationary comeback.

Reflecting this, our 6% allocation to the iShares Core UK Gilts UCITS ETF (IGLT) returned -1.5% by the end of the year.

Within equities, the only position to underperform the benchmark was our 3% allocation to the rate sensitive iShares Developed Markets Property Yield UCITS ETF (DPYA), which gained 3.8%.

Final thoughts

Reflecting on the year and into 2025, the key conversation is around how investors square the sword of Damocles dilemma that is their US equity allocations.

The focuses will be on whether they will be rewarded for moving down the size spectrum, how sizeable their US bias should be relative to other geographies and crucially, whether lofty, priced-in earnings expectations can continue being realised.

These conversations are already splitting opinions between me and my new assistant portfolio manager, senior reporter Toby Lawes, CFA. However, consensus seems to be found in neutralising risk within our fixed income bucket and continuing to side-step UK and European equities in favour of diversifying into Japan, China and satellite considerations for India, defence sector, gold miners and blockchain exposure.