Which Two ETFs Surged by 30% or more in 2024 and Could Potentially Repeat the Feat in 2025?
In 2024, the S&P 500 delivered an impressive 25% return, marking its second consecutive year of 20% or more returns. This robust performance came as a welcome rebound from the bear market lows of 2022. While the S&P 500 impressed, certain sectors outperformed the benchmark index.
Two of these shining stars from 2024 were the ARK Autonomous Technology & Robotics ETF (ARKQ) and the Financial Select Sector SPDR ETF (XLF). ARKQ, with its focus on AI-driven stocks, gave its investors a whopping 34% return, while XLF, the financial sector tracker, clocked in at nearly 31%.
ARKQ: The AI ETF with a Twist
While AI ETFs are a dime a dozen, ARKQ stands out from the crowd. Unlike most AI ETFs, it opts for active management, allowing its manager, Cathie Wood, to hand-select a portfolio of stocks with the aim of outperforming the market. Unlike traditional AI ETFs focusing on megacap tech stocks, ARKQ goes for the smaller yet promising companies with significant growth potential.
Sitting comfortably in its list of top holdings, Tesla (TSLA) may be a household name, but its remaining top holdings, like Kratos Defense & Security (KTOS), Teradyne (TER), Archer Aviation (ACHR), and Rocket Lab USA (RKLB), are relatively lesser-known.
XLF: The Power of Banks
XLF, the Financial Select Sector SPDR ETF, concentrates on tracking the financial sector's growth. With a low expense ratio of 0.09% and over $50B in assets under management, this powerful fund invests in major financial sector players like Berkshire Hathaway (BRK.A) (BRK.B), JPMorgan Chase (JPM), Visa (V), Mastercard (MA), and Bank of America (BAC).
In 2024, the Federal Reserve's interest rate cuts proved a significant boost to financial institutions, helping lower their cost of capital and boost net interest margins. Furthermore, the outlook of weakening loan defaults and falling consumer spending fears proved overly pessimistic.
Moving forward, a few factors will influence XLF's performance in 2025:
- Interest Rates: Continued modest interest rate cuts in 2025 could provide financial institutions with an additional boost from interest income.
- Consumer Spending: Strong American consumer spending, despite rising household debt, could persist in 2025.
- Valuation: Financial stocks tend to have lower valuations compared to tech stocks, making them a potentially attractive investment option in a market where tech valuations are high.
- Regulatory Environment: Anticipation of lighter bank regulation could contribute to an optimistic outlook and improved performance for XLF.
As for ARKQ, its performance is largely tied to technological advancements, innovation, and market volatility in areas like autonomous transportation, robotics, 3D printing, and energy storage. Both ETFs have their strengths and could potentially outperform the S&P 500 in 2025, but it pays to remember that past performance does not guarantee future results. Investors should approach these ETFs as solid long-term investment opportunities and make decisions based on their interest in the underlying companies' growth potential.
In light of the impressive returns, investors might consider diversifying their portfolio by allocating funds to sectors that performed exceptionally well, such as ARK Autonomous Technology & Robotics ETF (ARKQ) and the Financial Select Sector SPDR ETF (XLF). For instance, ARKQ, with its focus on AI-driven stocks, could provide a high return due to its active management strategy and investment in promising smaller companies.
In the context of finance and investing, the robust performance of the S&P 500 in 2024 and the potential gains from ARKQ and XLF can be attractive to those looking for diverse investment opportunities, seeking to capitalize on technological advancements or financial sector growth, respectively.
