Investors utilizing exchange-traded funds (ETFs) to access portfolio diversification will often find outsized returns in leveraged products—those seeking to double or triple the daily returns of a given index or other benchmark. However, these funds are highly risky and may also multiply losses, and they are typically only intended for short-term, active trading purposes.
Those investors interested in achieving outperformance with a less-risky, non-leveraged product might consider one based on historical performance. Though past results are no guarantee that one of these leading funds will continue to rise, those timing entry into a position in a momentum fund well do have the opportunity to benefit. Three funds that have performed well in 2024—and which may be able to keep that trend going into the new year—are the Invesco Alerian Galaxy Crypto Economy ETF (BATS: SATO), the Grayscale Future of Finance ETF (NYSEARCA: GFOF), and the ETRACS Alerian Midstream Energy Total Return Index ETN (NYSEARCA: AMTR).
SATO: Diversified Exposure to the Cryptocurrency Space
With a 1-year return as of December 5, 2024 of 110.1%, SATO is among the top-performing ETFs of the year in any category. The ETF targets the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index, a broad collection of companies and other funds focused on the cryptocurrency industry.
SATO's rise has coincided with a significant rally across the crypto space, as the price of Bitcoin surged past $100,000 for the first time in early December. Unsurprisingly, a sizable portion of SATO's portfolio is dedicated Bitcoin-related investments, including the iShares Bitcoin Trust ETF (NASDAQ: IBIT). But SATO is more diversified than a pure-play Bitcoin fund—it also holds cryptocurrency mining companies, shares of crypto exchanges, and even more generalized tech firms responsible for building hardware and infrastructure used in the industry.
SATO's expense ratio is a relatively modest 0.60%, but investors do have to be prepared for some potential issues with liquidity. The fund is very small, with just over $11 million in assets under management, and has a 1-month trading volume as of December 5, 2024 of under 12,000.
GFOF: Strong Alternative to SATO
GFOF employs a strategy similar to SATO above, focusing on companies driving innovation in digital asset infrastructure, finance, and the technology that undergirds these industries. While GFOF has not quite matched the performance of SATO over the last year, it nonetheless has returned more than 94% in the same time period, dramatically outperforming the broader market.
The price for GFOF's diversified play on the digital asset space is an expense ratio of 0.70%, slightly higher than SATO. Like the fund above, GFOF also may present liquidity challenges—it has about $10 million in assets and a 1-month trading volume of just over 4,000 as of December 5, 2024.
Both GFOF and SATO lean toward the highly speculative cryptocurrency space. However, by broadening their portfolios to also include a range of companies involved in the production of infrastructure and tech that is associated with digital currencies—as well as a host of other burgeoning industries—these funds may be able to benefit from surges in crypto while cushioning against tumultuous periods.
AMTR: Midstream Energy Refuge in Volatile Times
AMTR tracks an index of North American midstream energy companies involved in operations like liquefaction, storage, and transportation of energy commodities. The index is float-adjusted and market-capitalization-weighted, with some of the largest holdings in the portfolio as of December 5 including Enterprise Products Partners LP (NYSE: EPD), Enbridge Inc. (NYSE: ENB), and The Williams Companies Inc. (NYSE: WMB), representing 10%, 9%, and 9% of invested assets, respectively.
The midstream energy industry is a crucial component of the broader energy sector and one that is often viewed as more defensive—midstream companies' operations depend on their capacity to store and transport energy products and so are less impacted by fluctuations in prices. Given widespread geopolitical turmoil, investors seeking a more cautious approach to energy investment might find refuge in AMTR. This fund is up about 49% in the year leading to December 5.
ETFs for Risk Management
The three funds above represent varying levels of risk and are appropriate for investors with different tolerances. Both SATO and GFOF are focused on a speculative industry, while AMTR targets a more defensive play in a core, established market. Investors might consider this as well as past performance when considering how to incorporate a fast-climbing ETF into their portfolios.
