On this week’s episode of ETF Prime, Cinthia Murphy, investment strategist at VettaFi, joined host Nate Geraci. The two discussed five ETF predictions for the year, including cautious investing, actively managed small-cap strategies, and other trends. Later, Rob Arnott, founder and chairman of the board of Research Affiliates, joined Geraci to talk valuations and investing in companies recently dropped from major indexes.
Top 3 Predictions to Watch for in 2025
Murphy kicked off the discussion of trends to watch this year by forecasting that 2025 will remain in 2024’s shadows in terms of flows. It’s not a forecast for weak flows, but one based on historical trends. The last record-breaking year for flows before 2024’s $1 trillion milestone fell in 2021, when ETF AUM breached $900 billion for the first time. Such banner years historically don’t occur back-to-back.
Add in expectations for a cautious investing year, and the case for a record-breaking flows year this year seems slim. “I think it will be a year of high volatility, high uncertainty,” noted Murphy. It’s the type of environment that generally foments worry and caution in investors.
That said, 2025 could prove a fruitful year for actively managed small-cap strategies. Murphy believes it will be a central trend for the year, particularly as advisors and investors try to diversify from recent large-cap concentration. While valuations in the small-cap space aren’t cheap in terms of historical averages, they’re cheap in comparison to the steep valuations in many large- and mega-cap indexes.
“I think it will be a year where you have to be very selective,” she said. “The challenge of small caps, as we know, is that a lot of these companies aren’t always profitable.” It’s the type of environment that may favor actively managed strategies within small-caps, particularly while the interest rate narrative remains questionable. Firms like Dimensional and Avantis offer compelling actively managed strategies within the space.
A third ETF trend Murphy predicts for 2025 is a renewed focus on dividend strategies as a means to defensively invest in quality equities. Specifically, Murphy believes dividend-growing ETFs will prove popular this year with investors. “When you think about defensive, and you think about factor investing, quality tends to come up,” she explained. However, “there’s no universal definition of quality, and I think dividend growers are a very tangible way to tackle that concept.”
Dividend-growing strategies to consider include the WisdomTree US Quality Dividend Growth Fund (DGRW) and the globally focused Capital Group Dividend Growers ETF (CGDG).
2 More ETF Trends for the New Year
Given the uncertainty and cautious approach to investing in 2025, Murphy predicts increasing adoption for downside protection ETFs. These include buffer strategies, structured protection, and defined outcome strategies. The category has experienced a surge in offerings and interest in the last year in particular, with firms like Innovator and Calamos launching a number of ETFs. “This is a space that took awhile to catch speed because the education hurdle is so high here,” she said. “But I think it’s getting far more user friendly, far more approachable.”
Lastly, Murphy predicts another strong year for crypto, though she made no predictions on cryptocurrency prices or directionality. Ongoing innovations in the category, including downside protection and income strategies will likely continue to draw investor interest, even in a risk-averse environment.
As a bonus, a final prediction for 2025 revolved around the ongoing interest in thematic ETFs, particularly weight loss.
Bucking Trends: A Case for Investing in Deletions
Rob Arnott, founder and chairman of the board at Research Affiliates, joined Geraci to talk deletion investing and markets. The firm created the index that the Research Affiliates Deletions ETF (NIXT) tracks in the second half of 2024. The fund invests in companies removed from the S&P 500 and the Russell 1000 Index.
“Many of them are troubled companies,” Arnott said. “The narrative about their troubles, their travailing headwinds, are true — but they’re already reflected in the share price. The only way the stocks would hurt you is if they underperform bleak expectations.”
The strategy capitalizes on the devaluation that happens when a major index must sell a stock. Indexes generally owns 25% of the market share of a stock. Because the stock is already in a decline, the seller often must further depreciate the price to entice buyers (active managers) to purchase. NIXT seeks to harness this opportunity to purchase deeply discounted, small-cap value stocks. These stocks historically go on to recover and outperform over a five-year period according to Arnott.
“If you go back to October of 1989, if you invested in deletions from the S&P and Russell Indexes, you would have 74 times your money today,” said Arnott. Additionally, he stated that it’s much easier for a small company that’s made it big before to rebound than it is for a small company to break into bigger indexes for the first time. It makes for a compelling case for investing in NIXT when looking to small-cap value stocks.
Listen to the Entire Episode of ETF Prime, Featuring Cinthia Murphy & Ron Arnott
For more ETF Prime podcast episodes, visit our ETF Prime Channel.