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Seasoned investors often approach the markets with a long-term view, using short- and medium-term volatility to buy into the themes they believe will pan out over many years. While identifying these trends is difficult, tuning out the noise can help you focus your portfolio on the winners, possibly resulting in significant gains.
Here are five of the most popular investment trends right now — including several themes that show significant potential for growth in 2023 and beyond.
1. Artificial intelligence
The technological revolution has brought artificial intelligence (AI) to the forefront of society, making a reality of what was previously only imagined. With AI disrupting many aspects of our lives, the emerging technology could become the most influential industry of the century.
Analysts at International Data Corporation (IDC), a provider of market intelligence, predict that by 2026, worldwide revenues for the AI market could reach $900 billion, logging a compound annual growth rate of 18.6 percent from 2022-2026.
At its core, AI attempts to replicate human intelligence with greater accuracy and speed. As computers and machines become more intelligent, AI becomes more powerful, with its uses and applications impacting nearly every industry.
Consider DALL-E 2, an AI system that uses machine learning algorithms to create realistic images and art from text, or ChatGPT, an advanced chatbot capable of composing detailed human-sounding prose in seconds.
Whether it’s self-driving vehicles, robo-advisors or researchers using AI for drug discovery, the technology is already prevalent.
For most retail investors, exchange-traded funds (ETFs) offer an efficient and easy way to invest in AI stocks, getting you exposure to the theme without having to dig into individual stocks. Here are three to consider: Global X Robotics & Artificial Intelligence ETF (BOTZ), ARK Autonomous Technology & Robotics ETF (ARKQ) and ROBO Global Robotics and Automation ETF (ROBO).
2. Rising interest rates
To curb inflation, the Federal Reserve has increased interest rates to the highest level since 2006 while suggesting more rate hikes could still be on the way.
Historically, specific sectors of the economy tend to perform well in a rising rate environment. When it comes to financial institutions, for example, even a small interest rate increase can mean billions of dollars in interest income as they charge higher rates on loans. However, many banks have recently come under pressure due to unrealized losses in their bond portfolios, as long-duration assets they held have suffered due to the rise in interest rates.
But with the sector beginning to normalize after a downdraft, now may be an attractive time to buy.
Investors seeking exposure to this sector may consider ETFs such as the Financial Select Sector SPDR Fund (XLF) or the SPDR S&P Regional Banking ETF (KRE).
3. Income investing
With the overall rise in interest rates over the past couple of years, investors can again turn their attention to earning decent rates of return on fixed-income investments. When interest rates were near zero, most people got used to earning nothing on their savings and short-term investments. But now high-yield savings accounts pay above 5 percent and some CDs pay over 5 percent, too.
Investors who are looking to generate income while maintaining exposure to the stock market can invest in high-dividend stocks or dividend funds. These investments come with solid dividend yields and can appreciate further if the underlying companies perform well. The Vanguard High Dividend Yield ETF (VYM) and the Schwab US Equity Dividend ETF (SCHD) are two funds to consider.
Income generated from investments can help you manage through periods of high inflation or just generate some extra cash to use as you please. Make sure you’re earning a decent return on your savings – it’s been a long time since that option has been available.
4. Inflation protection
Inflation hit multi-decade highs in 2022, and many investors are still searching for inflation protection, especially as economists don’t expect inflation to return to normal levels for at least another year.
Treasury Inflation-Protected Securities, or TIPS, and Series I Bonds are two simple ways to protect your savings from rising inflation costs. The U.S. government issues these securities, setting the yields according to the inflationary environment. For example, the par value of TIPS rises with inflation, while I Bonds have a variable interest rate that adjusts with inflation. I Bonds currently come with an interest yield of 4.3 percent, but that rate could change at the end of October.
Stocks have also proven to be an effective inflation hedge over the long term. Companies with pricing power can pass on higher costs to their customers, allowing them to maintain or even increase their profit margins over time. In the short term, however, concerns around persistent inflation can spook investors and cause stock prices to fall.
During inflationary periods, investors often turn to gold as a store of value. But unlike stocks, gold doesn’t produce anything for its owners. You won’t receive increasing dividend payments over time like you would with a broad stock portfolio.
Gold investors can buy the physical asset or invest using ETFs such as the SPDR Gold Shares (GLD).
5. ESG investing
The disruption and uncertainty caused by the global pandemic ignited a renewed interest from investors, consumers and employees for those corporations that prioritize environmental, social and governance (ESG) practices. Beyond profits, these enterprises have decided to focus on long-term value creation over short-term gains.
And those choices appear to be paying off. According to Morningstar, ESG investment inflows in the fourth quarter of 2022 rose to $37 billion, with total assets invested reaching about $2.5 trillion.
By embracing responsible business practices, shares of sustainable corporations tend to be more resilient than their peers.
For example, research from Bank of America shows that the stock of corporations with solid ESG practices tend to be less volatile, have higher three-year returns and are less likely to declare bankruptcy.
One way to invest in socially conscious companies is through ETFs like the iShares MSCI USA ESG Select ETF (SUSA), which tracks an index of highly rated ESG companies. Here are other top ESG funds to consider.
Purpose-led organizations hope to set the pace for a better future. By focusing their efforts on reducing carbon emissions, minimizing waste, advancing social issues, and fostering equality, equity, and inclusion, among other noble causes, these corporations are redefining the role of business in society.
Note: Bankrate’s Brian Baker contributed to an update of this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.