Will this year’s top-performing stock ETFs stay hot in ’24?

In movies, it was Everything Everywhere All at Once. In music, Bonnie Raitt’s “Just Like That.” In sports, Spain won the FIFA Women’s World Cup.

This year’s pop culture winners have included plenty of surprises.

The same can be said about U.S. equities.

Stocks brushed aside rampant inflation and rising interest rates to produce what many consider to be a surprisingly strong year. Barring an appearance from Scrooge, the S&P 500 will finish 2023 with a total return of at least 20%. It would mark the fourth time in the last five years that the index has posted high double-digit percent gains. Resilient to say the least given the recent mix of macroeconomic and geopolitical headwinds.

If the capital markets hosted an Oscars-style award show, there would be plenty of worthy nominees. Mega-cap technology, a group that typically underperforms in a rising rate environment, is crushing it. Growth stocks, which typically lag when inflation is high, are vastly outperforming. So are a bunch of emerging investment themes like artificial intelligence (AI), cybersecurity and digital currencies.

Which brings up an important question for investors heading into 2024: will this year’s disconnect between economic conditions and asset class outperformance persist? Or will we see a more normalized investment setting where value and defensive sectors attract more buyers?

The good news is that if there is a clear market rotation, it won’t happen overnight. This means shareholders in these three top performing exchange traded funds (ETFs) will have an opportunity to secure gains — and move on to be the potential trophy winners of 2024.

#1 – ARKK

This year has been sweet revenge for ARK Innovation ETF (NYSEARCA: ARKK) manager Cathie Wood. The widely followed fund is up 55% year-to-date after suffering a 67% decline in 2022. Thanks to a drastic shift in market sentiment towards high-risk tech names, last year’s worst-performing stocks have turned into some of this year’s best.

Top ARKK holding Coinbase Global is up 300% amid optimism around an upcoming Bitcoin ETF launch. Roku, the fund’s second-largest position, is up 140% on rising subscribers and an anticipated rebound in digital advertising demand (boosted by the election cycle). Meta Platforms, Palantir Technologies and Shopify have also more than doubled in 2023.

The encouraging news for Aunt Cathie loyalists is that most ARKK stocks are still trading well below their all-time highs. At 10.6% of the ETF, Coinbase will be a big driver of future performance. The crypto trading platform (and former $400 stock) is one of the most polarizing names on Wall Street with seven analysts calling it a buy and seven a sell. Street sentiment around Roku is more bullish. What looms large, however, is that both Coinbase and Roku have significant downside based on their respective consensus price targets.

#2 – FBCG

The Fidelity Blue Chip Growth ETF (BATS: FBCG) has been in the right place at the right time. Up 53% so far this year, the fund has benefitted from investors’ increased appetite for familiar tech leaders — and some unlikely heroes. While mega-caps like NVIDIA and Meta Platforms have been major return contributors, so have companies like Abercrombie & Fitch, DraftKings and Uber Technologies. The ETF has also gotten a big boost from owning Moonlake Immunotherapeutics, a mid-cap biotech that is up more than 400% year-to-date.

Whether FBCG can outperform in 2024 will depend heavily on Microsoft, Apple, NVIDIA and Amazon. Together, these stocks account for 40% of the portfolio compared to roughly 20% in the S&P 500. Although the fund is well diversified with about 150 holdings, it is quite top-heavy. Prospective investors should also be aware that the fund isn’t cheap — the expense ratio is 0.59%. There are less expensive and less concentrated ways to ride the growth train.

#3 – VCAR

The Simplify Volt RoboCar Disruption and Tech ETF (NYSEARCA: VCAR) is a thinly traded thematic ETF, but one that has performed extremely well. It invests in leading disruptive companies in the autonomous vehicle space, such as Advanced Micro Devices, Tesla and Lemonade. What’s also unique about the fund is that it “enhances” its highest conviction bets through an options overlay strategy. It is an approach that has served shareholders well, with the ETF up 54% this year.

The expense ratio is high at 0.99%, but VCAR has a surprisingly high dividend yield (3.3%) which makes this easier to swallow. The self-driving car story has been accompanied by much hype — but also much doubt. This week, Barron’s called the space a popped bubble. Robotaxis may be the future, but after a huge run-up this year, its biggest proponents will have a lot to prove in 2024. Trading well below its $19.43 peak, VCAR is a high-risk play in a nascent, regulatory-challenged industry.