Trends don’t run forever. These ETFs can be contrarian winners in 2024

While many of the 2024 outlooks coming from Wall Street shops are building toward a stock market consensus, sometimes the best way to beat the market is by going against the grain. In a note to clients on Tuesday, Strategas ETF strategist Todd Sohn laid out several ways to invest as a contrarian in 2024, including betting on at least a partial reversal of the big trends of 2023. For example, the big story in health care has been the GLP-1 weight loss drugs. But that rally has largely passed investors who primarily use ETFs, since Danish company Novo Nordisk isn’t in some of the biggest health care ETFs , and the wide-ranging benefits of an anti-obesity drug clouded the outlook for treatments made by other companies. That narrow leadership could reverse course in 2024, as the new drug market becomes clearer and lower interest rates help buoy riskier biotech stocks. Investors could increase exposure to those smaller stocks with funds like the Invesco S & P 500 Equal Weight Health Care ETF (RSPH) and the SPDR S & P Biotech ETF (XBI) , which have badly underperformed the broader market in 2023. “If you’re feeling good about next year and you think the market is going to continue to trend higher, then biotech is the way to do it,” said Todd Sohn. Sohn said that investors could also look at equipment ETFs like the iShares U.S. Medical Devices ETF (IHI) and the SPDR S & P Health Care Equipment ETF (XHE) as a counterweight to the weight loss trend. The XHE is down about 8% on the year. XHE YTD mountain Medical device stocks have struggled in 2023, as shown by the XHE sector fund. “Everything has been weight loss this, weight loss that. … [equipment stocks] had a good run here in the last month, but they’re another group that probably got hit way too much based on this weight loss stuff and was definitely affected by this rapid rate hike cycle,” Sohn said. Hesitation in industrials Another way to look at contrarian investing can be to study where the money is flowing, and then swim in another direction. Sometimes, this approach can turn up stocks that are already performing well even if other investors have been reluctant to embrace them. One such area is industrials, where flows to broad sector funds have been anemic even as some funds that stress defense contractors have brought in cash. “Most of the attention usually goes to defense-related stuff. I think that’s very headline driven … but those funds have not performed as well as some of the other industrial funds that are out there,” Sohn said. Persistent concerns about the economy could be one reason that investors have been reluctant to jump into industrials, even as the sector has started to rally. But if sentiment shifts, the influx of cash could create another big jump for the funds. The Industrial Select Sector SPDR Fund (XLI) is up 11.6% in the fourth quarter, while the iShares US Transportation ETF (IYT) has gained 13% in the same period. “It seems very lethargic for a sector that is doing really well and benefits from some of the policies that are going on,” Sohn said.