2 Equity Plays for Cautious Bulls in 2025

What we found was a prevailing, cautiously bullish sentiment for the direction of U.S. markets for 2025. Advisors and investors attending our symposium shared that sentiment too. In a survey conducted during the event, 75% of those attending said they were feeling bullish about U.S. equities, most about U.S. fixed income as well. We invite you to check out the replay of our event here.

Bullish or not, investors face a macro picture that remains mired by uncertainty, primarily of the geopolitical kind, but also around policy and the path of interest rates. 

For equity investors, in that environment, two big investment themes come to mind as ways to navigate uncertain waters.  

The first is a focus on diversification, not just broadly, but also within the equity allocation. 

A strong 2024 marked by multiple record highs across multiple indexes and assets has made many investors happy with their results. But it’s also led to a lot of concentration in a few big names. Concentration risk has, in fact, been a big topic of conversation in many circles in recent months. 

With ETFs, achieving diversification is easy. Among the simplest-yet-effective ways to do it is through equal weighted ETFs. 

A fund like the Invesco S&P 500 Equal Weight ETF (RSP A-), which equal-weights the stocks in the S&P 500, has delivered 18% in returns so far in 2024. Its also attracted more than $14 billion in net creations this year. Other funds in the category like the iShares MSCI Equal Weighted ETF (EUSA A) have also seen investor interest. 

Jeffrey Mayberry, portfolio manager of the DoubleLine Fortune 500 Equal Weight ETF (DFVE B-), said equal weighting can offer resilience to a portfolio as market leadership broadens out and the recent big winners consolidate their recent run. 

In an equal-weighted portfolio, you’re mitigating single-stock risk by allocating equally across all holdings. You’re also changing the sector exposure as a function of the weighting methodology.  

Historically, from 2018-to-date, according to DoubleLine data, an equal-weighted portfolio of top 500 names has tilted more toward consumer stocks and materials as opposed to technology, healthcare, and real estate. That sector difference leads to performance differences as sectors take turns leading market performance. 

The second focus is on generating equity income. Dividend ETFs are a great way to achieve that, especially at a time when many companies are boasting strong balance sheets and profitability. 

What’s interesting is that in our symposium, everyone who talked about generating income through dividends also highlighted the importance of adding quality metrics to that pursuit. Why? Because not all dividends are created equal. 

“Just simply saying I want more dividends might not be enough on a go-forward basis when you are thinking about how to best achieve the goal of generating additional equity-oriented income from your asset allocation,” said Paul Baiocchi, head of ETF strategy at SS&C ALPS. “High yields aren’t always high for good reason.” 

Sometimes high dividends are tied to market expectations or, worse, to high leverage. Those conditions may make the yields — and the companies behind them — vulnerable in a market correction, he said. 

For a long-term investor, a dividend strategy tied to fundamental strength of its underlying holdings may offer resilience more than a high yield play. 

Funds like the ALPS O’Shares U.S. Quality Dividend ETF (OUSA B+) and the WisdomTree U.S. Quality Dividend Growth ETF (DGRW A) are examples of strategies that are looking for quality companies generating quality dividends that are also growing overtime. 

The small- and midcap space may be especially interesting, according to some of our speakers, as interest rates come down and a new administration ushers in a new backdrop for smaller businesses. 

Kevin O’Leary, chairman of O’Shares Investments and of Shark Tank fame, said he’s positive on the outlook for 2025, especially for mid- and small-cap quality companies. 

“There are two elements that are important to consider,” he said. “We have certainty on corporate tax rates, which affect S&P 500 earnings for the next two years. They aren’t going to 28%." 

“More important than that, the regulatory environment at the federal level is going to be washed clean,” O’Leary added. “There’s going to be so much deregulation going on here, and that matters for U.S. companies. This deregulation is a ‘release the hounds’ mentality. Small and midcap companies are going to benefit from this environment.”  

In the small-cap space, OUSA and DGRW’s counterparts ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM A) and WisdomTree U.S. Small Cap Quality Dividend Growth ETF (DGRS B+) are among the ETFs that offer similar methodologies delivering equity income from quality companies. This may be a space to watch.  

There’s no question that it’s been a challenging time for dividend investors because the market has rewarded growth over value. But if most of the experts sharing views in our symposium were right, that dynamic could be changing going into 2025 as market leadership broadens out. 

In that case, broader diversification, quality dividends, especially among mid- and small-cap names, could emerge as interesting ways to put money to work in the new year.  

We invite you to check out the replay of our event here.

VettaFi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for OUSA and OUSM, for which it receives an index licensing fee. However, OUSA and OUSM are not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSA and OUSM.

For more news, information, and analysis, visit VettaFi | ETFDB.