Global ETF trends to watch in 2025

by Jason Xavier, Head of EMEA & Asia ETF Capital Markets, Franklin TempletonĀ 

I cannot believe Iā€™m already drafting my annual 2025 exchange-traded fund (ETF) outlook! The year 2025 is a milestone for me as it marks a quarter century working in financial services, (along with more grey hair and weathered skin). Time is the only constant! So, this instils even more of a sense of urgency in me. Given that time is precious, the value of using it efficiently becomes clearer. Therefore, many thanks for reading thus far and we hope youā€™ll find the reflections and predictions here worth your time.

Our 2024 predictions were fairly on point as the year saw macro and geopolitical volatility persist, with developed and select emerging markets benefiting from the year of artificial intelligence (AI) awareness.

My general sense is that 2025 may similarly feel like a transitional one, with a continuation of monetary policy easing in developed markets and the investment spotlight still shining on themes like AI, its supply chain, ecosystem and infrastructure. Of course, some residual US political uncertainty Ā and continued geopolitical tensions remain ever-present to add some spice and volatility.

2025 ETF predictions

US and developed market equity ETFs will see an increase in assets under management (AUM)

This time last year, we were staring down the barrel of slowing global inflation and interest-rate cuts framed against a backdrop of weakening jobs data, suggesting a potentially hard landing for the US economy. While inflation has remained sticky through most of this year, labour markets have been increasingly resilient, suggesting the hard-landing narrative be cast aside (for nowā€”more on this later).

Considering the entirety of 2024, the S&P 500 Index could very well end the year having seen more than 50 all-time highs reached throughout.1 The so-called ā€œAI bullā€ of 2024 is showing telltale signs of chasing the red cape into 2025, with global mega-cap tech firms at the forefront and now broadening the investment case out to infrastructure growth to support the AI ecosystem.

Aside from those within the AI supply chain, multinational corporations that can either develop in-house solutions or effectively implement external tools should be able to benefit from productivity gains and reap the rewards of additional cash flow. This, together with continued developed market monetary policy easing, suggests investors may be wise to take the bull by the horns in 2025 and gain broad global exposure to this transformative developed market trend.

Single-country emerging market ETFs will outperform a broader allocation

Republicans and Donald Trump have scored victory in the US presidential race, resolving some of the uncertainty heading into 2025. Trumpā€™s second term in office could lead to significant potential economic and market impacts, given the high tariff agenda of the Republican party. The agenda could heavily influence industry, most notably for the United States and China. Major name brands have pulled back in the region and continue to divert a considerable amount of production supply away from China and instead toward India, which doesnā€™t help Chinaā€™s economy in the face of domestic demand debility.

President Xi Jingpingā€™s most recent stimulus package came in response to Chinaā€™s early year woes and cries for fiscal help, turning the tide in Chinese markets, which kicked off a healthy rally before the countryā€™s equity markets subsequently suffered their worst fall in 27 years.2 One thing we believe is certain in 2025 is that the waters will continue to be choppy in the Far East. Therefore,Ā we continue to be bullish on tech-heavy emerging market economies such as South Korea, TaiwanĀ and, depending on any further bumper stimulus,Ā China.

Additionally, our stance on India remains the same as last year, with the country and leadership focused on supportive government policies which includeĀ infrastructure development andĀ free trade agreements. Indiaā€™s narrative is shifting fromĀ ā€œIs India the new China?ā€ to ā€œIndia is the new India!ā€ Further growth is anticipated, owing to the countryā€™s focus on technology andĀ digitizationĀ coupled with itsĀ favorableĀ demographics, growing middle class and healthy domestic consumption.

US and EU investment-grade corporate bond ETFs should be an AUM winner

Clearly, the economic ā€œlandingā€ story has been more drawn out than the data suggested when I made my ETF predications last year. However, conditions remain consistent: Inflation is falling, and most central banks are cutting interest rates. Nonetheless, the addition of another year of relative economic stability marked by low corporate defaults and circumstances indicative of optimistic company earnings, are helping the US economy potentially achieve a ā€œsoft landingā€ (A soft landing describes an economy slowing, allowing inflation to fall, without tipping into a recession). Historically a soft landing combined with continued easing has been a positive driver for both equity and bond markets. Against this backdrop, we maintain a more hands on approach to navigating fixed income and believe actively managed quality fixed income from both the US and eurozone (US and euro IG) will likely outperform over the coming 12 months.

See that didnā€™t take too long!

 

 

 

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.Ā Ā 

EquityĀ securitiesĀ are subject to price fluctuation and possible loss of principal.

Fixed income securitiesĀ involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.Ā Low-rated, high-yield bondsĀ are subject to greater price volatility, illiquidity and possibility of default.

Changes in the credit ratingĀ of a bond, or in the credit rating or financial strength of a bondā€™s issuer, insurer or guarantor, may affect the bondā€™s value.

International investmentsĀ are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified inĀ emerging markets.

For actively managed ETFs, there is no guarantee that the managerā€™s investment decisions will produce the desired results.

ETFsĀ trade like stocks, fluctuate in market value and may trade above or below the ETFā€™s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.Ā Past performance is not necessarily indicative nor a guarantee of future performance.Ā All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (ā€œFTā€) has not independently verified, validated or audited such data.Ā  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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1. Source: Bloomberg.

2. Source: Bloomberg

 

 

Copyright Ā© Franklin TempletonĀ 

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