Market Predictions & ETF Ideas for a New Year

Every new year brings with it a new opportunity to stop for a moment, take stock of where we currently sit, revisit resolutions, and refresh outlooks.

When it comes to markets, we begin by looking backwards towards where we’ve just been and make educated guesses as to where we - as in, our investment opportunity set - are headed next.

The big picture coming into this new year is one marked by uncertainty. In the U.S., we have a new administration taking office later this month, and a very different administration at that. The potential for policy and regulation change is huge, along with market impact. However, clarity as to what actually gets implemented is murky at best.

Adding a visibility challenge is an economy faced with mixed data, still battling sticky inflation and a rate environment that has been quickly changing. Geopolitical noise, too, is another issue. There’s plenty going around.

So, what are markets going to do in 2025, and where are the investment opportunities? To the extent that market predictions may offer any helpful insight, here are five areas I’m closely watching this year:

Portfolio Construction in the New Year

ETFs will remain a tool of choice for portfolio construction. However, demand may not exceed the record $1.1 trillion in net creations we saw in 2024.

The ETF industry has delivered robust growth since its birth more than 30 years ago. That said, asset creation isn’t a straight line up.

In 2024, we saw immense demand for ETFs across asset classes, market segments and strategies. The mega cap, tech upward move we saw, mostly fueled by the artificial intelligence theme, attracted many bulls to the ETF fold. That upward momentum wasn’t just for large cap equity investors, either. Gold bugs, too, saw the precious metal match S&P 500 gains last year. It was quite the run. And then, there was bitcoin. For the first time, ETF investors could access spot bitcoin through ETFs. As a category, new-to-market crypto funds were another big asset gatherer.

The truth is that ETFs continue to show their structural value as an investment tool, and to that extent, there’s no reason to expect demand for ETFs to slow down. However, uncertainty, volatility, and jitters about the global economy could give some investors pause as they look for places to put money to work. We could see some reluctance to dive right in and add to ETF assets if 2025 does, in fact, offer a moderation of market gains, and anything less than perfectly clear skies. And while product development will remain robust on the ETF front, what are the chances we break ground on an entirely new category like we did last year with spot digital asset ETFs?

It’s also worth noting that before the 2024 asset haul, the previous ETF asset gathering record was set in 2021. It took us three years to revisit that milestone and surpass it. It could be that 2025 brings a really strong year for ETF assets, but it may not bring another annual record. We will see.

Small Cap Opportunities

2. Small cap stocks may finally have their moment, or better yet, small cap active managers.

The opportunity in small caps is interesting in the current market. For starters, there’s a valuation angle that’s worth exploring. Small cap stocks aren’t all that cheap relative to their historical averages, but they are cheap relative to their larger counterparts. If you look at the trailing P/E for the iShares Russell 2000 ETF (IWM) vs. that for the iShares Russell 1000 ETF (IWB), small caps are trading at a nearly 44% discount to large caps.

Small caps haven’t outperformed large caps in almost a decade, but most market projections are calling for the size factor to deliver this year thanks in part to the valuation opportunity but also to better expected earnings growth among small caps vs. large caps.

But when it comes to implementation, it could be that active managers deliver some additional value in this category. That’s because there are a lot of unprofitable small cap companies. Going into Q4 2024, data showed that about 40% of names in the Russell 2000 were unprofitable. A traditional market-cap index approach of small cap stocks could include a lot of companies that aren’t fundamentally strong. It’s no surprise we often hear calls for a focus on quality when it comes to small cap investing.

Unfortunately, there aren’t a lot of active small-cap ETFs. But there are some really interesting ones. Dimensional Fund Advisors, for example, has a long history of small cap active management. The firm’s approach is research and data heavy, and it emphasizes its focus on a systematic process for investing - a process they’ve been perfecting, as they put it, for years. Funds like the Dimensional U.S. Small Cap ETF (DFAS) and the Dimensional US Small Cap Value ETF (DFSV) will be worth watching.

Avantis, from American Century, is another shop offering good active management in the small cap space. The firm is known for its systematic approach, as well as for its low fees. Funds to watch here include the popular Avantis U.S. Small Cap Value ETF (AVUV),which is a portfolio comprising 750 holdings that commands over $15 billion in assets under management today.

These are just some of the funds offering access to small cap stocks. For a comprehensive list, check out our Small Cap ETF List.

Focus on Quality

3. Dividend growers will benefit from pursuit of quality stocks as a more defensive-way to access equities.

There is an overall call for a focus on quality in 2025 as recent market leaders moderate their gains. Dividend payers - specifically, dividend growers - could benefit.

Like small caps, dividend payers haven’t impressed much recently. In 2024, they, too, lagged the broader market. The largest dividend ETF, the Vanguard Dividend Appreciation ETF (VIG), delivered 17% in total returns in the past one-year, which compares to 24% for the Vanguard Total Stock Market ETF (VTI) and 25% for the Vanguard S&P 500 ETF (VOO) in the same time frame.

That disparity offers dividend stocks a valuation upper hand at a time when many are calling for a focus on value (vs growth). For a quick measure of that valuation opportunity, consider the trailing P/Es for the iShares Core Dividend Growth ETF (DGRO) vs. the iShares Core S&P 500 ETF (IVV): 21.9 vs 29.5. Dividend growers are trading at about a 25% discount to a broad large cap portfolio.

There are many ETFs in this category that offer broad exposure, or that either focus on high yielders or on growers, like DGRO. It’s the growers that could be especially interesting due to their strong fundamentals, strong balance sheets, and consistent growth of dividend over 10, 20, 25 consecutive years - all tangible measures of quality. Funds like the WisdomTree US Quality Dividend Growth Fund (DGRW) stand out in the space with an index-based multifactor strategy that weights by dividends.

And consider that in a global approach, the quality-meets-attractive-value is even more striking. A fund like the Capital Group Dividend Growers ETF (CGDG), where the portfolio is only about 50% allocated to U.S. names, the discount to U.S. large caps (measured by trailing P/E) nears 50%. There’s significant relative value here if you want to take on international stock risk. In the past year, the fund has returned about 18%.

For a comprehensive list of Dividend ETFs, check out our list.

Downside Protection's Benefits Shine

4. Downside Protection ETFs will broaden their reach as product development and education converge, highlighting benefits of the category.

The so-called Buffer ETF category first came to be about six years ago with the arrival of Defined Outcome ETFs. These ETFs offer a pre-determined range of upside and downside capture that reset annually.

Since the first few funds came to market, many more asset managers as well as product ideas have followed. Today, buffer investing includes different types of strategies, each with their own set of characteristics. Product innovation means sharper and sharper tools are consistently coming to market, empowering investors to managed downside risk. But it also means the education hurdle remains large. Investors must work to understand the mechanics and portfolio implications of each strategy type.

In 2025, a mix of ample product, growing familiarity with the category and demand for downside protection given market uncertainty could fuel adoption of these ETFs. Among the “flavors” of protection, investors can opt for Defined Outcome strategies - a space where Innovator ETFs are a pioneer. Funds like .Innovator U.S. Equity Power Buffer ETF - January (PJAN), for example, comes to mind.

The suite of Managed Floor ETFs could be especially interesting for investors who are looking to bubble wrap the core of their portfolios. These ETFs don’t limit upside capture, and while you have to be willing to face an initial downside capture before protection kicks in, they are built on a laddered options strategy, meaning there’s no outcome period reset. That makes them great vehicles for core, more perennial-type exposure. Funds here include Innovator Equity Managed Floor ETF (SFLR) and its small cap counterpart.

Structured Protection ETFs offering 100% downside protection and some upside participation are another approach that offers compelling characteristics for risk-aware investors. Firms like Calamos have done a lot of great product development in this space. Calamos ETFs include funds like the Calamos S&P 500 Structured Alt Protection ETF (CPSM) and the Calamos Laddered SP 500 Structure Protection ETF (CPSL), among others. There are ETFs offering downside protection in small cap stocks, too.

New Year Remains Exciting for Crypto

5. Crypto is going to have another exciting year of action. Whether prices will go or down, who knows?! But it will be exciting to see, and ETFs will remain a popular way to access the space.

Spot bitcoin and ethereum ETFs made their splashy entry into the ETF market in 2024. In 2025, they will continue their asset gathering - and attention grabbing - as prices and investor sentiment fluctuate.

What will be especially fun to watch is the product development that will continue to break new ground. Late last year we welcome some interesting new takes on this opportunity set. For example, the NEOS High Income Bitcoin ETF (BTCI), which sets out to generate consistent income on a bitcoin allocation by investing in VanEck’s spot bitcoin ETF HODL and writing calls to generate monthly income. BTCI just launched last October, so it’s still early days. Still, the fund currently has a distribution rate (annualized) of about 28%.

Another recent newcomer is the STKD Bitcoin & Gold ETF (BTGD), which offers a 2-for-1 allocation to bitcoin and gold at the same time. And coming up later this month, Calamos is launching the first downside protection bitcoin ETF. It offering 100% downside protection on a crypto allocation. The Calamos Bitcoin Structured Alt Protection ETF - January (CBOJ) will be the first of a series of ETFs in the space. According to Calamos’ Head of ETFs Matt Kauffman, each will offer different levels of downside protection and upside capture. As he put it, “Bitcoin is the best power source for capital protected growth.”

Relying on Cboe Bitcoin U.S. ETF Index Options (CBTX), the fund series can easily scale given the deep liquidity of the options market. CBOJ can do more than offer unique access to bitcoin to the more risk-averse investor. In addition, it can also be a complementary tool to investors and institutions looking to capture growth while managing downside risk, and/or to market makers and traders looking to hedge spot bitcoin exposure.

It is this type of product development that promises to keep things really interesting in the crypto ETF space in 2025. At least for product nerds like us.

And with that, we are off to the races. Happy investing in the new year!

For more news, information, and analysis, visit VettaFi | ETF Trends.

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