5 popular investment trends right now (Q1 2023)
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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 reveal what’s to come, possibly resulting in significant gains.
As we welcome a new year, let’s highlight five of the most popular investment trends right now — looking at 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 2024, worldwide revenues for the AI market could top $500 billion, logging a five-year annual compound growth rate of 17.5 percent.
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-like prose in seconds.
Whether it’s self-driving vehicles, robo-advisors, or researchers using AI for drug discovery, the technology is already everywhere.
For most retail investors, exchange-traded funds (ETFs) offer an efficient and easy way to invest in AI 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 Index ETF (ROBO).
2. Rising interest rates
To curb inflation, the Federal Reserve has increased interest rates to the highest level since 2007 while suggesting more rate hikes could be on the horizon.
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.
Another group that often benefits are cash-rich companies with low debt. As yields rise, these corporations collect higher yields on their cash reserves. Within the S&P 500, technology and health care companies often have the biggest cash piles, as many hoard cash for strategic acquisitions and other growth opportunities. Tech stocks struggled mightily in 2022, however, as even the biggest names saw a sharp pullback in share prices as the Fed tightened monetary policy.
Investors seeking exposure to these sectors may consider ETFs such as the Financial Select Sector SPDR Fund (XLF), Health Care Select Sector SPDR Fund (XLV), or the Technology Select Sector SPDR Fund (XLK).
Outside of stocks, investment returns in the bond market are also highly correlated with interest rates. And there are multiple investment strategies investors can follow to profit from this trend, from investing in short-term fixed-income securities to reinvesting coupons from long-term bonds.
3. The metaverse
The future of the internet includes virtual worlds where humans can interact without the confines of physical space. And according to analysts’ estimates, these virtual environments could be the next big investment opportunity.
Thanks to greater computing power, faster internet connectivity, and other technological advancements, tech companies are developing ecosystems where people can shop, play, exercise, learn, and experience most life activities digitally. Meta (FB), for example, plans to spend billions building the metaverse.
As audiences for these virtual environments grow, so does the interest from corporations trying to capitalize on this trend. Art gallery Sotheby’s, for instance, operates a virtual gallery in Decentraland, a 3D virtual world. Similarly, Nike (NKE) has expanded its digital footprint by acquiring RTFKT, a virtual sneaker company.
Likewise, Microsoft (MSFT) has set in motion the acquisition of Activision Blizzard for $68.7 billion in the most significant gaming deal in history — and a big bet on the expansion of the metaverse. The deal has faced significant regulatory scrutiny by governments around the world.
Among other investment opportunities, analysts point to NVIDIA (NVDA), a semiconductor company that powers computer graphics, as a potential winner from the growth of the metaverse. In addition, Autodesk (ADSK) and Unity Software (U), software makers that allow architects and designers to create 3D models, and cloud-technology provider Fastly (FSLY) are also top names in the space.
For those looking for broader exposure, Roundhill Ball Metaverse ETF (METV) invests in a basket of companies involved in the metaverse.
4. Inflation protection
According to data from the U.S. Labor Department, inflation remains above its highest level since the early 1980s, forcing Americans to deal with higher prices across a bevy of items. With the increasing cost of living, investors are looking for ways to protect their purchasing power, 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 6.89 percent, but that rate could change at the end of April.
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 to favor those corporations that prioritize environmental, social and governance (ESG) causes. Beyond profits, these enterprises have agreed 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 first half of 2022 rose to $120 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 shares 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. Some of the names on the list include American Express (AXP), Accenture (ACN), Disney (DIS), Home Depot (HD) and Hasbro (HAS).
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 a previous version 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.