MW Why these ETF bets in stocks and bonds may pay off in 2025, according to BlackRock
By Christine Idzelis
Year 3 of a bull market 'can be choppy,' cautions Todd Sohn of Strategas
Hello! This week's ETF Wrap looks at some ways investors could lean into stocks in 2025, after a rush into equity-focused exchange-traded funds late last year. I caught up with BlackRock's Kristy Akullian, who shared some ETF strategies for navigating stocks and bonds this year.
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Investors with an appetite for equities should consider leaning into high-quality U.S. stocks as the bull market runs beyond its two-year anniversary, according to BlackRock.
BlackRock's pro-risk stance in early 2025 would favor an overweight to equities in a traditional portfolio comprising 60% stocks and 40% bonds, said Kristy Akullian, the giant asset manager's head of iShares investment strategy for the Americas, in a phone interview.
The firm prefers stocks in the U.S. over the rest of the world, she said, with "quality" being "the most important feature that we're focusing on for U.S. equities in 2025." Akullian pointed to the iShares MSCI USA Quality Factor ETF QUAL as one way for investors to get such exposure.
Many of the "highest-quality names in the U.S. equity market are more on the growth side of the equation than the value side of the equation," she said. After growth stocks crushed value equities in 2024 with outsize gains, "we still think that growth can continue to beat value broadly," Akullian said. But "that doesn't mean there aren't pockets of opportunity within value."
The iShares Russell 1000 Growth ETF IWF, which has heavy exposure to Big Tech stocks, soared 33.1% in 2024 on a total-return basis - far exceeding the 14.2% total gain of the iShares Russell 1000 Value ETF IWD last year, according to FactSet data.
"We've really seen growth outperform value in a period where interest rates have been high," said Akullian. "Part of our expectation for 2025 is that interest rates are going to stay higher for even longer."
Investors are trying to discern the future path of interest rates amid a recent jump in bond yields. The direction of rates may be influenced in part by trade and immigration policies under the incoming White House administration, as well as investor worries over the need to fund a large U.S. deficit with a greater supply of Treasurys.
Akullian likes the iShares MSCI USA Quality Factor ETF because it's "sector neutral" and broadly diversified. Unlike some growth funds, "it's not just leaning entirely into technology," said Akullian; rather, it's broadly aiming to find "the highest-quality companies within each sector."
She also pointed to the iShares U.S. Equity Factor Rotation Active ETF DYNF as another way to navigate the equities market in 2025, saying it rotates exposures to stock attributes as the environment changes. The ETF currently "dislikes small caps a lot right now," while being positive on the "momentum" factor and leaning "pretty heavily into high quality," said Akullian.
She expects U.S. economic growth may be strong this year and still "above trend," but slowing. With uncertainty around sticky inflation, such a macroeconomic backdrop may generally favor growth stocks over value equities, according to Akullian. Value stocks tend to be more "cyclical," and would typically outperform in an environment in which "economic growth is not just strong but accelerating," she said.
As for pockets of buying opportunities within value stocks, she suggested the iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI - explaining that some of its holdings stand to benefit from a potential "deregulatory agenda" under the next White House administration, as that could result in mergers and acquisitions picking up.
Goldman Sachs Group Inc. $(GS)$, Morgan Stanley $(MS)$ and S&P Global Inc. $(SPGI)$ were the top three weights in the ETF's portfolio as of Jan 8, data from BlackRock's website show.
Choppy bull market?
Heading into 2025, ETF investors appeared enthusiastic about prospects for the U.S. bull market to keep running.
The S&P 500's SPX strong return in 2024 was similar to its gain in 2023 - yet investors last year poured almost twice as much money into equity ETFs last year, according to Strategas ETF strategist Todd Sohn. They piled into equity ETFs in the final two months of 2024, with unprecedented back-to-back monthly inflows each exceeding $100 billion, he said by phone.
But in January, the percentage of index-based equity ETFs trading at more than two standard deviations above their 200-day moving averages fell to just 1% as recently as Jan. 6, down from almost 50% in late November, said Sohn.
The third year of a bull market "can be choppy," he said. Bull markets may start with a big surge off a low point for stocks, but by year three, the continued climb risks becoming "challenging."
The bull market for U.S. stocks began in October 2022 and is now about three months past its two-year anniversary. Sohn tracked the average bull-market performance for the S&P 500 and small-cap-focused Russell 2000 RUT over its first three years in a research note earlier this week.
The U.S. stock market was closed Thursday, observing a national day of mourning as the funeral of former President Jimmy Carter was held in Washington.
What about bonds?
Investors turning to the bond market as a ballast for their portfolios face uncertainty over how policies under President-elect Donald Trump may influence the Federal Reserve's rate-cutting cycle.
A recent rise in bond rates has heightened volatility at the long end of the yield curve.
The bond market was open on Thursday, but closed early. The yield on the 10-Year Treasury note BX:TMUBMUSD10Y edged lower Thursday to 4.68%, after rising on Wednesday to its highest level since April 25 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
The iShares 20+ Year Treasury Bond ETF TLT was down 1.5% this year through Wednesday, after rising long-term yields pummeled the fund in 2024, according to FactSet data. Last year, the index-tracking ETF lost 8.1% on a total-return basis.
BlackRock favors the short end of the yield curve through to the three-to-seven-year "belly," with the index-tracking iShares 3-7 Year Treasury Bond ETF IEI providing such exposure, according to Akullian. The fund has fared better than the long-term Treasury ETF, posting a modest 0.2% decline in January through Wednesday after returning a total 1.8% in 2024.
Bond yields and prices move in opposite directions.
For help navigating the bond market, Akullian suggested the iShares Flexible Income Active ETF BINC, which actively invests across various sectors of the bond market globally. The ETF is up 0.1% so far in January, after returning a total 5.8% in 2024, according to FactSet data.
New ETFs
-- Fred Alger Management said Jan. 6 that it launched the Alger Russell Innovation ETF INVN, which aims to invest in the most innovative companies in the Russell 1000 index RUI.
-- BlackRock BLK has launched the iShares Large Cap Max Buffer Dec ETF DMAX, which began trading this month. The fund is designed to track the price return of the iShares Core S&P 500 ETF IVV, with an upside cap and downside protection.
Weekly ETF reads
-- Ether ETF holders could see this popular trading strategy open up if Trump's return goes the way they want (MarketWatch)
-- Your Fancy, New ETF Might Be a Little Too Fancy (Wall Street Journal)
-- New ETFs that combine bitcoin exposure and options are coming in 2025 (CNBC)
-- Bitcoin Languishes as US ETFs See Second-Highest Daily Outflow (Bloomberg)
-- Big-Tech Love - And Fear - Fuels Record Boom for Invesco's ETFs (Bloomberg)
-Christine Idzelis
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(END) Dow Jones Newswires
January 09, 2025 19:27 ET (00:27 GMT)
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