ETF Market Bucking Macro Headwinds in 2025

Global Equities Surge in Early 2025, US Assets Lag Behind

NEW YORK – January 14, 2025 – A wave of optimism is sweeping across global markets in the early days of 2025, with year-to-date results showing widespread gains. Developed market stocks outside the United States are leading the charge, posting an remarkable 20.1% total return as of Monday’s close.This strong performance places them comfortably ahead of the second-best performer, global real estate ex-US, which has delivered a 16.1% return year to date.

In contrast, US assets are demonstrating more subdued growth.American shares have gained 6.9%, while US junk bonds, real estate investment trusts, and investment-grade US bonds are showing even more modest increases. Notably, amidst this broad market upswing, no asset classes are posting losses, signaling a generally positive sentiment among investors.

Analysts attribute this widespread optimism, in part, to stable interest rates. The benchmark US 10-year Treasury yield has been trading within a range, settling at 4.44% yesterday. While this represents a mid-range level for the year, a important rise above its recent high of approximately 4.60% could potentially shift investor sentiment and lead to a reassessment of current market expectations.

Looking ahead, investor expectations for long-term returns remain remarkably high.A recent survey of 7,000 investors by Natixis Investment management revealed that US respondents anticipate stocks to generate annual returns of 12.6% above inflation over the long term.However, some market observers express skepticism regarding these lofty projections, citing their own models that forecast US equity performance in the low-5% range for the coming decade. This contrasts sharply with the annualized ten-year performance of US stocks as 2024, which averaged between 10%-12%.

The current investor outlook appears to be heavily influenced by recent market performance, a tendency that seasoned investors often caution against. While the possibility of a sustained bullish trend cannot be dismissed,a degree of skepticism regarding the longevity of these high expectations remains.

How are active ETFs impacting the overall ETF market share compared to passive ETFs?

The Resilience of exchange Traded Funds

Despite persistent global economic uncertainties – including inflation, geopolitical tensions, and fluctuating interest rates – the ETF (Exchange Traded Fund) market has demonstrated remarkable resilience throughout 2025. This unexpected strength isn’t accidental; it’s rooted in evolving investor strategies and the inherent advantages ETFs offer in a volatile landscape. we’re seeing continued growth in ETF investments, driven by both retail and institutional investors.

Understanding the Macroeconomic Challenges

Several important macroeconomic headwinds have been impacting global markets this year:

Inflationary Pressures: While cooling from 2024 peaks, inflation remains above target levels in many major economies, forcing central banks to maintain hawkish monetary policies.

Interest Rate Hikes: Aggressive interest rate increases by the Federal Reserve and other central banks have increased borrowing costs and slowed economic growth.

Geopolitical Risks: Ongoing conflicts and political instability continue to create uncertainty and disrupt supply chains.

Recession Fears: the possibility of a recession in major economies, particularly the US and Europe, looms large.

Supply Chain Disruptions: Lingering effects from past disruptions and new challenges continue to impact production and distribution.

These factors have traditionally led to market downturns, but the ETF market has largely defied these expectations.

Why ETFs Are Outperforming in 2025

Several key characteristics of ETFs are contributing to their strong performance amidst these challenges:

Diversification: ETFs inherently offer diversification, spreading risk across a basket of assets.This is particularly valuable during times of uncertainty when individual stock picking becomes more challenging. Diversified ETF portfolios are proving more stable.

Lower Costs: Compared to actively managed mutual funds, ETFs generally have lower expense ratios, preserving more of investors’ returns. This cost-effectiveness is a major draw in a yield-sensitive environment.

Liquidity: ETFs trade on exchanges like stocks,offering high liquidity. Investors can easily buy and sell shares throughout the trading day.

Transparency: ETF holdings are typically disclosed daily, providing investors with clear visibility into their investments.

Strategic exposure: ETFs allow investors to gain targeted exposure to specific sectors, themes, or investment strategies, such as technology ETFs, renewable energy ETFs, or value ETFs.

Sector Rotation and ETF Flows

A significant trend observed in 2025 is a clear pattern of sector rotation within the ETF market.

Defensive ETFs: Early in the year, investors flocked to defensive ETFs – those focused on sectors like utilities, consumer staples, and healthcare – seeking shelter from market volatility.

Value ETFs Surge: As interest rates stabilized somewhat,value ETFs experienced a resurgence,benefiting from the potential for earnings growth in undervalued companies.

Emerging Markets resilience: Surprisingly, emerging market ETFs have shown relative strength, driven by improving economic conditions in certain regions and attractive valuations.

Thematic ETFs Gain Traction: ESG ETFs (Environmental, Social, and Governance) and innovation ETFs continue to attract long-term investors, reflecting a growing focus on sustainable and disruptive technologies.

The Rise of Active ETFs

While passive ETFs remain dominant, active ETFs are gaining market share. These ETFs are managed by portfolio managers who actively select investments with the goal of outperforming a benchmark index. The Shanghai Stock Exchange is even seeing increased interest in stock options as investors seek to hedge their ETF positions (SSE, 2025). This suggests a more sophisticated approach to ETF investing.

Real-World Example: The Energy Sector ETF

Consider the energy sector. Despite fluctuating oil prices,energy ETFs have performed well in 2025. This is due to a combination of factors:

Supply Constraints: Geopolitical events have limited oil supply, pushing prices higher.

Increased Demand: Global demand for energy remains robust, particularly in emerging markets.

Strategic Positioning: Investors used energy ETFs to capitalize on the anticipated price increases.

This example illustrates how ETFs can provide targeted exposure to specific sectors and allow investors to profit from market trends.

Benefits of ETF Investing in 2025

Portfolio Diversification: Reduce risk by spreading investments across multiple assets.

* Cost-Effective Investing: Lower expense ratios compared to