Markets are coming off back-to-back gains of more than 20% each. That’s historically rare, and the chances of a hat trick in 2025 are slim to none. Not to mention, stocks historically do worse in the second half of year three of a bull market. Most Wall Street estimates peg S&P 500 gains this year somewhere in the high single digits with limited dispersion. The median forecast is a gain of 9% – less than half of last year’s returns. Meaning, advisors and investors will have to work much harder.
Rather than ride out the dominance of the mega-cap Magnificent Seven space and the market’s wave of record highs, investors will have to dig deeper and look to more sophisticated strategies to unearth alpha opportunities in the new year. The U.S. active ETF market has surged in size from less than $100 billion in assets in 2018 to nearly $900 billion as of November 30, 2024. By this past summer, flows into active ETFs had nearly eclipsed all of those of 2023. Given the market environment, the active ETF scene will continue to see robust demand.
Systematic Strategies: Smart Beta Screening
Investors have shown strong interest in smart-beta strategies, which combine both active and passive approaches to investing. Essentially, they take a systematic, index-based approach with an active stock-picking overlay. Dimensional Fund Advisors has been a pioneer of the systematic, smart-beta strategy since inception and has grown to become the largest active ETF manager in the nation. In fact, 17 of the top 50 largest U.S.-listed active equity ETFs are all Dimensional funds. The Dimensional U.S. Core Equity 2 ETF (DFAC ) leads the list with more than $32 billion in assets under management.
| Top 20 Largest Active Equity ETFs | |
|---|---|
| Name | AUM ($MM) |
| JPMorgan Equity Premium Income ETF (JEPI) | 36,990 |
| Dimensional U.S. Core Equity 2 ETF (DFAC) | 32,358 |
| JPMorgan NASDAQ Equity Premium Income ETF (JEPQ) | 20,800 |
| Avantis U.S. Small Cap Value ETF (AVUV) | 15,239 |
| iShares U.S. Equity Factor Rotation Active ETF (DYNF) | 13,614 |
| Dimensional U.S. Equity Market ETF (DFUS) | 12,759 |
| Capital Group Dividend Value ETF (CGDV) | 12,207 |
| Dimensional US Marketwide Value ETF (DFUV) | 11,140 |
| Dimensional U.S. Targeted Value ETF (DFAT) | 10,752 |
| Dimensional U.S. Small Cap ETF (DFAS) | 9,433 |
| Capital Group Growth ETF (CGGR) | 9,221 |
| Dimensional International Value ETF (DFIV) | 8,095 |
| Avantis U.S. Equity ETF (AVUS) | 7,786 |
| Dimensional International Core Equity Market ETF (DFAI) | 7,204 |
| Dimensional US High Profitability ETF (DUHP) | 7,189 |
| Dimensional International Core Equity 2 ETF (DFIC) | 7,120 |
| Avantis Emerging Markets Equity ETF (AVEM) | 7,089 |
| Dimensional World ex U.S. Core Equity 2 ETF (DFAX) | 7,086 |
| Dimensional US Core Equity Market ETF (DFAU) | 7,059 |
| JPMorgan International Research Enhanced Equity ETF (JIRE) | 6,799 |
Also well represented on the list is Capital Group, whose own active ETF suite just crossed the $50 billion threshold in total assets, after starting the year with roughly $19 billion. Meanwhile, its roster of active fixed income ETFs has risen more than 60% in total assets from the prior year. Scott Davis, Head of ETFs at Capital Group, said the demand for active is clearly going strong.
“Often, the outcome an investor seeks with investing is lost when we speak of passive or index-only investing,” he said. “The last few years have demonstrated concentration risk and the need for active management as a diversifier. We believe rigorous fundamental research into companies, industries, and individual securities is an important aspect to long-term investment results and risk mitigation.”
Davis added that advisor concerns over historically high concentration risks are also fueling the drive to diversify. “Advisors are looking to active managers to diversify that growth and identify the next set of companies that will power growth in the future,” he said.
The Capital Group Growth ETF (CGGR ) speaks to this widening appetite for diversification. The $9 billion fund takes an active multi-management approach with about 31% exposure to the Magnificent Seven, while its benchmark, the Russell 1000 growth, has more than 50% exposure. And yet, CGGR has risen more than 42% over the past year on a total return basis, versus 32% for the Russell 1000.
Weighing Your Options: Return-Enhancing Strategies
Covered call strategies, which allow investors to sell call options on securities and collect premiums for recurring income, were all the rage in 2024 and will continue to gain traction this year. For investors who want to stay in the market, these products can serve as attractive means of boosting incremental returns while cushioning against downside volatility. They tend to perform particularly well in range-bound markets, which many have come to expect this year following last year’s roaring 27% rally in the S&P. JPMorgan has largely cornered the market when it comes to covered call ETFs, boasting dominant inflows into the JPMorgan Equity Premium Income ETF (JEPI ) and JPMorgan NASDAQ Equity Premium Income ETF (JEPQ ). JEPI now has $37 billion in total assets, while JEPQ has north of $20 billion in AUM. The NEOS S&P 500 High Income ETF (SPYI ) is also among the world’s largest active equity ETFs, focusing on downside protection with capped upside potential.
For those worried about a larger market correction, certain structured downside protection ETFs, known as buffer ETFs, can help reduce the risks of a diversified portfolio. The FT Vest Laddered Buffer ETF (BUFR ), for instance, seeks to provide large-cap equity exposure while minimizing downside risk. Calamos recently launched its Calamos S&P 500 Structured Alt Protection ETF (CPSM ) – designed to match gains in the S&P 500 up to a defined cap while protecting against 100% of losses over a one-year period.
With fewer and more hawkish rate cuts in the cards, plus plenty of fiscal and geopolitical uncertainty ahead, there is no shortage of active solutions and innovations out there in the ETF landscape for advisors to turn to as they chart their course for the year ahead.
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