Navigating uncertain interest rate trajectories, persistent inflationary pressures and elevated US equity valuations are some of the key asset allocation decisions that fund selectors must grapple with for the year ahead.
For equities, balancing exposure between high-growth US markets and undervalued global alternatives will be in focus.
Meanwhile, fixed income offers renewed appeal, particularly in short-duration bonds amid stabilising rate expectations.
Against this backdrop, we asked four members of ETF Stream’s ETF Buyers Club for their market outlook and top ETF picks for 2025.
Andrew Limberis, investment director at Omba Advisory & Investments
Last year highlighted a number of key risks to investors - some of which may play out in 2025. A core area of focus is the primed and somewhat rich nature of valuations, especially in the US.
This along with concerns over the predictability of short-term interest rates will be a challenge to investors.
On the fixed income side, 2024 was not an easy year and the forward path for rates in many developed markets has proven investors wrong on numerous occasions.
In equities, we know that in the long-term valuations matter but this has little practical use and the importance of maintaining some equity exposure remains high, even in light of notable political risk and some signs of a slowing global economy.
To balance these risks, a global and diversified solution that also offers a high dividend yield may be attractive to many investors who are willing to forego some equity upside.
This ticks many of the boxes that we currently like – principally a global, diversified view that’s a bit more defensive and that does not grapple with the uncertainty of returns due to duration risk.
ETF pick
JPM Global Equity Premium Income Active UCITS ETF (JEPG)
Dan Caps, investment manager at Evelyn Partners
As we enter 2025, inflation and monetary policy continues to be at the forefront of investors’ minds. Following the hawkish rhetoric from the Federal Reserve at the final meeting of 2024, the stage has been set for interest-rates to stay higher-for-longer as inflation remains stubbornly above target.
Donald Trump’s tariffs and tax cuts, should these be implemented, will only further add to this inflationary pressure.
From a valuation perspective, the US continues to look expensive, while the Trump trade looks overdone and is already beginning to lose some of its momentum.
Both JP Morgan and Morgan Stanley have raised concerns regarding the returns for the S&P 500 over the next decade, and we’re looking further down the market-cap spectrum in the US for returns going forward.
While the economic outlook outside of the US is challenging for many regions across both developed and emerging markets, valuations are also much more forgiving.
Any turnaround in fortunes could see investors reward, but it’s difficult to see what the catalyst for this might be.
Outside of equities, short-to-medium duration sovereign bonds look attractive as the recent guidance from the Fed has now been priced-in, while credit-spreads remain too tight to adequately reward investors for this additional risk.
Gold should continue to be a worthwhile diversifier in a multi-asset portfolio but is unlikely to reproduce the stellar returns of the last few years.
All-in-all, 2025 is another year to remain well-diversified while keeping a close eye on economic data points as we embark on this next chapter in the post-COVID-19 inflation story.
ETF pick
Xtrackers MSCI World ex USA UCITS ETF (EXUS)
Raj Manon, head of multi-asset investments at Marlborough
The S&P 500 has become increasingly dominated by a limited number of mega-cap tech giants, which have accounted for a disproportionate share of the index’s performance.
However, we expect lower interest rates and the deregulation promised by Donald Trump’s administration to create favourable conditions for a broader range of equities to perform.
For this reason, we are, as we did last year, choosing an equal-weight S&P 500 ETF as our pick for 2025. The equal-weight approach provides more balanced exposure by giving each company in the index the same weighting. This reduces concentration risk and ensures that gains are not overly reliant on a handful of dominant stocks.
It provides a greater allocation to companies trading on more attractive valuations, which we believe provides more potential upside, while also offering a degree of protection if there is a pullback in some of the more highly valued stocks.
In addition, it provides greater exposure to sectors such as consumer discretionary and industrials, which typically benefit more from falling interest rates.
ETF pick
Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW)
Stephan Kemper, chief investment strategist at BNP Paribas Wealth Management
We remain pro-risk in our equity allocation due to a friendly baseline of stable global growth, further declines in inflation and continued central bank cutting cycles.
The US economy should benefit from a more business friendly environment of fiscal easing and deregulation.
While uncertainty on tariffs may be rising, in aggregate, corporates sound hopeful on a post-election capex and sales recovery. Also, optimism is building on a recovery in business confidence and capital markets activity, including M&A.
As valuations, at least for certain pockets of the US market, have reached lofty levels, long-term returns are likely to be lower for the major US indices.
Given less demanding valuations in other areas of the US market and a macro back drop much more favorable to this cohort, we still believe that investors should keep investing in the US. We prefer US small and mid-caps over US equal weight and US market cap weighting.
In terms of themes, we keep looking at ways to invest in the rapidly changing infrastructure requirements which arise from a growing adoption of artificial intelligence (AI).
We do like the entire data center ecosystem. At the same time, the electricity demand is going to show strong growth, resulting in ongoing needs for grid enhancements and carbon free electricity generation.
Those are areas of interest, too. Talking about AI, we shift our focus from the enablers and start looking at the beneficiaries of AI usage. For instance, companies actively using AI in order to secure a healthy growth path going forward.
In bonds, short maturity US investment grade credit could offer interesting opportunities as well, especially for European investors.
The yield pick up stands at roughly two percentage points. While this looks appealing to us, due to the short maturity, we keep duration and spread risks at bay thanks to the short maturity.
