What’s in store for ETFs in 2025?

In 2024, around half of the world’s population had the opportunity to head to the polls, most notably in the U.S. This year of elections presented investors with many questions and uncertainties over economic growth, inflation, and interest rates. 

It seems a large and increasing number of investors are looking to address those questions through ETFs, as 2024 proved a record-breaking year for flows into the ETF industry globally. This was especially true in the European space, which saw a quarter of a trillion dollars of inflows. 

In terms of exposures, U.S. equity and fixed income ETFs were both strong areas of growth. With c.80% of ETF AUM globally still in equities, one of the more interesting trends that continued through 2024 was positive momentum in areas that represent demand for more choice by ETF investors. Fixed income ETFs continued to gather pace, as did ESG-related ETFs, while actively managed ETFs saw surging popularity drive $17bn of inflows. 

As we enter 2025, what elements should ETF investors be weighing up as they consider their exposures?

Equity exposures 

Equities had another stellar year in 2024, with strong performance across the board. 

The U.S. became even more central in terms of asset allocation amid impressive performance. While this was mostly multiple expansion-driven, earnings were also a key factor. The ‘Magnificent Seven’ group of stocks led performance on EPS growth, but we expect that to converge at some point, meaning broader participation in market performance. Overall, our view heading to 2025 is to be cautious on valuations in the U.S., but positive overall since underlying growth and EPS are still sound. 

Outside the U.S., the rest of the global economy has also been strong over the past two-to-three years and equity market performance has been robust - and mainly EPS-driven. For 2025, we expect global growth of around 3.2%, which supports our positive view for EPS growth globally over the year. 

We do not feel EPS growth is at risk for now, and expect it to remain positive, albeit with some downward revision. This will be key, especially in the U.S. given that there is little room for further valuation multiple expansion, unlike in Europe. Overall, when looking at exposures in the U.S. versus Europe for 2025, we believe it may make sense to favour the U.S. at the start of the year as there are currently no near-term concerns on growth in our view. However, as 2025 progresses, European equities actually stand to potentially benefit from three performance drivers – multiple expansion thanks to lower rates, low but positive EPS growth, and a high dividend yield – while the U.S. can only rely on EPS growth as the single performance driver. When we also consider the potential for good news on a stimulus plan following the German election, we feel Europe could offer the more compelling opportunities as the year progresses. 

Meanwhile, some emerging market economies are currently enjoying strong growth and supportive demographics such as India, Indonesia, and Turkey while Eastern Europe could benefit from a resolution of the conflict in Ukraine. That said, currency effects are important for emerging market exposures and a stronger dollar is a clear headwind. Furthermore, China is always at the forefront when assessing emerging markets. At the moment, China is difficult to assess because we do not know yet whether stimulus measures are working or what may happen with tariffs. So, China should be on the radar but with the need to understand how those factors could play out. 

Fixed Income exposures 

Similar to equity markets, fixed income broadly experienced very solid performance in 2024. There were two key factors driving this. Firstly, yields have come down since May, and secondly, there has been credit spread compression across the spectrum. It’s been a bumpy ride, but high single- or double-digit returns make for a strong year overall. 

We think there are reasons to be believe 2025 can continue to deliver solid performance in fixed income due to supportive elements globally such as inflation coming under control, slowing growth, and accommodative central banks. 

The main factor will be divergence, not all economies are on the same path. Expectations for growth in the eurozone are much lower than in the U.S. There is a risk that inflation in the U.S. overshoots in the wake of Trumps’ measures and forces the Federal Reserve to be more cautious, leaving rates higher for longer. Meanwhile, we believe there are risks in China that should factor into investment choices. However, divergence and volatility may create potential opportunities for investing. The key will be to be active and selective throughout the year, as we are still anticipating headwinds and a continued bumpy ride. 

In 2024, credit, high yield, and emerging markets were among the highest performers within fixed income. Going into 2025, we still see value in both investment grade and high yield credit as corporate fundamentals remain healthy, and while the default rate is rising, it remains manageable. However, valuations have become stretched and there are always idiosyncratic risks, so again, we believe selectivity is important. We like sectors such as banking, basic industries, and Real Estate. Overall, we believe ETF investors may want to pay attention to high yield in the first half of 2025 because of the attractive credit premium available, but if the default rate picks up, considering switching into investment grade (U.S. or European) would make sense. 

We also see value in sovereign debt where central bank action should support positive expected returns. We think it will be vital to dial duration up and down during 2025, favoring the short end of the curve in the early part of year and then expecting to roll that up as the year progresses. Meanwhile, there may be opportunities to diversify through emerging markets where there are some supportive elements, such as oil prices and rating upgrades. 

Designing ETF exposures for whatever comes next 

There is certainly a lot for investors to weigh up as we start the new year, the good news is that there has never been more choice in addressing all these topics, and more, through ETFs. Over the past few years, AXA IM has been building an ETF range focused on active equity and fixed income exposures. The foundation of the range is the integration of our longstanding expertise into innovative ETF solutions spanning active and indexed approaches. More than ever in 2025, innovation is paramount to manage the key risks for portfolio management.