Morningstar’s Ben Johnson Recaps the Year in ETFs and Looks Ahead to 2025
Dec 17, 2024
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Ben Johnson is the Head of Client Solutions at Morningstar, known for his insightful analysis of ETFs. Joining him is Todd Rosenbluth, Head of Research at VettaFi, an expert in financial markets. They discuss record-breaking ETF inflows, the rise of Bitcoin ETFs, and the bullish outlook for 2025 among financial advisors. The conversation highlights the growing interest in active fixed income ETFs and the evolving landscape of dividend ETFs. They also share humorous takes on ETF ticker symbols and celebrate milestones in the industry.
Active ETFs have shown remarkable growth, capturing nearly 25% of ETF flows and highlighting a shift towards actively managed funds.
Financial advisors maintain a bullish outlook on equity markets heading into 2025, with 75% optimistic despite potential market corrections.
Geopolitical risks present a significant concern for capital markets in 2025, contrasting with the positive sentiment towards dividend-focused investments.
Deep dives
The Rise of Active ETFs
Active ETFs have become a prominent focus in the investment space, demonstrating significant growth in 2024. They have captured nearly a quarter of overall ETF flows, a substantial increase from previous years. This trend underscores a shift in investor preference towards actively managed funds, particularly as asset managers are increasingly launching active ETF products. Historical data shows that in 2024 alone, active fixed income ETFs gathered an impressive $100 billion in net new money, indicating a robust appetite for this investment style.
Optimism Ahead for Equity Markets
Financial advisors display a bullish sentiment towards equity markets heading into 2025, with nearly 75% expressing optimism. This upbeat outlook aligns with the S&P 500's nearly 30% rise in 2024, prompting expectations that momentum will carry into the new year. Despite this optimism, caution remains due to the potential for market corrections, a typical occurrence following sharp gains. As such, some advise considering broader market exposure beyond just the S&P 500 to mitigate potential risks.
Investor Concerns Around Geopolitical Risks
Geopolitical risks are identified as the foremost concern for capital markets in 2025, with 47% of advisors highlighting this issue. This sentiment reflects the uncertain landscape of international relations and potential impacts on market stability. However, earning surprises from major tech stocks, particularly the Magnificent Seven, also weigh heavily on investor sentiment, with 20% considering them a risk factor. The juxtaposition of bullish equity sentiments against these risks indicates a complex market outlook.
The Demand for Fixed Income Strategies
Advisors show a clear preference for fixed income investments heading into 2025, favoring investment-grade bonds and securitized debt. With 38% identifying investment-grade bonds as the most attractive segment, this reflects a cautious approach amid a backdrop of low credit spreads. Interestingly, there is also a strong interest in actively managed funds, with over half of advisors intending to increase their exposure to these products. The robust performance of active fixed income ETFs, like Fidelity's Total Bond ETF, highlights their growing popularity among investors seeking stability.
The Future of Dividend ETFs
There is a noticeable enthusiasm for dividend-focused ETFs, with 44% of advisors planning to increase their allocations to these products. This trend stems from a search for reliable income sources, particularly as interest rates are expected to remain elevated. Advisors emphasize the importance of quality in their selection, favoring companies capable of sustaining dividend growth. As markets transition, dividend ETFs may offer both income and growth opportunities, making them a crucial part of investment strategies for 2025.
Morningstar’s Ben Johnson reflects on a record-breaking year for ETFs and highlights key stories to watch in 2025. VettaFi’s Todd Rosenbluth discusses new polling data on how advisors are viewing financial markets heading into the new year.
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