Bet on Rekindled Growth, But Diversification Taking Hold

Coming into the week of the U.S. presidential inauguration, we had been talking about the importance of diversification in the face of so much uncertainty, geopolitical risk, and lofty equity valuations following massive market gains in recent years. 

Knowing well the power that recency bias has in our investment decisions, we had been collectively calling out the opportunity in some overlooked segments like small- and midcap stocks, value strategies, quality names, and some beaten sectors as well as international stocks, to name a few. 

As an industry, we came into the year talking about the importance of diversification and some caution, especially as many of our portfolios were overly concentrated and exposed to potential downside corrections following our recent love affair with large-cap growth stocks.  

And yet, the market keeps on delivering on that front. Here we are wrapping up the third week of 2025 with the S&P 500 testing — and potentially sticking to — new record highs (as of Thursday). The index is up more than 25% in the past year. The Invesco QQQ Trust (QQQ B), too, is up more than 25% in a year. And it’s up more than 3.7% so far in 2025. To many, the Q’s are a favorite proxy for growth. 

A look at ETF asset flows, perhaps unsurprisingly, shows that chasing growth and U.S. large-cap stocks is still very much in vogue. Take a look at some of the top asset-gathering ETFs so far this year:  

• Vanguard S&P 500 ETF (VOO A) has taken in $16.9 billion in net creations YTD
• Invesco NASDAQ 100 ETF (QQQM B+) has taken in $1.8 billion YTD
• SPDR Portfolio S&P 500 ETF (SPLG A-) has taken in $1.7 billion YTD
• Vanguard Growth ETF (VUG B+) has taken in $1.5 billion YTD
• iShares Core S&P 500 ETF (IVV A) has taken in $1.4 billion YTD

These five ETFs alone have captured about a third of all new asset creations in ETFs so far this year. If we consider that many of these funds are retail investor favorites for access to U.S. large-cap and growth names, we quickly get the image that appetite for growth is alive and well in 2025 among buy-and-hold-type investors. 

To put an exclamation point on the resurgence of risk appetite in the form of growth stocks, trader favorites are also capturing attention. Note that the ProShares Ultra QQQ (QLD A), a leveraged 2x Q’s ETF, has picked up more than $750 million in net new assets this inauguration week alone. That’s the second largest equity ETF asset haul this week, according to FactSet data. QQQ and the Direxion Daily S&P 500 Bull 3x Shares (SPXL A-) are also among the week’s top 10 asset gainers. 

But underneath these headline numbers, there are burgeoning signs of moderation — or diversification — taking hold.  

Small- and midcap portfolios have been finding some traction, albeit more slowly than we may have initially expected coming into the year. The Fidelity Enhanced Small Cap ETF (FESM), for example, is among the ETFs leading asset gains in the category, with $1.1 billion in net flows YTD. The Fidelity Fundamental Small-Mid Cap ETF (FFSM B+) has also picked up assets. The VictoryShares US Small Mid Cap Value Momentum ETF (USVM B+) — a fund that blends value, momentum, and size factors — has attracted more than $500 million in assets so far this year. USVM is up 16% in the past 12 months. 

In a similar vein, the iShares MSCI USA Quality Factor ETF (QUAL B) and the Vanguard Value ETF (VTV A) — two factor-focused ETFs capitalizing on investor concern about valuations and fundamental strength to support them — are also among the year’s top 20 equity ETF asset gatherers. The Capital Group Dividend Value ETF (CGDV A) is another example, taking in more than $500 million so far this year. The list goes on.  

So, what do we know so far this January? First, we know that assigning too much meaning to ETF asset flows is always tricky business, because they are, at best, a laggard indicator of investor sentiment. That said, asset flows point to a still-robust appetite for growth and U.S. large-cap stocks despite concerns that this part of the market may be overrun. Geopolitical risk, inflation, an uncertain path for interest rates, and earnings results are all at the forefront of investor concerns. But many are not quite ready to throw in the towel on large-cap growth — not yet anyway. 

Just as important, we also know through the numbers that many are pursuing diversification through factor, sector, and thematic opportunities that are slowly gaining ground. Capital preservation and protection on the downside remain big themes among ETF investors this year. Our many conversations with financial advisors confirm that — even as many look for maximum upside capture, too. 

What happens next no one really knows. But we will keep looking at the numbers. And we have a strong lineup of great conversations with advisors and asset managers diving into the most timely opportunities and investment themes in our webcast series. We invite you to join us in these conversations. Come work to make sense of markets and investing with us. Check out the calendar of webcasts here.

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