Expanded private asset availability in different vehicles and more outcome-oriented strategies are among some of the investment trends that are likely to dominate financial advisor-client discussions in 2025, as semi-liquid and options strategies continue to grow in offerings and in uptake by financial advisors, according to financial industry experts.
After two years of strong equity returns, advisors may be seeking new ways to diversify their client’s holdings beyond the traditional 60/40 stock/bond mix. That doesn’t mean the traditional portfolio asset mix is going away. It has a place in some client’s portfolios, but with a wide range of investment vehicles, advisors have more options to customize their clients’ asset allocation.
Demand To Continue For Active ETFs And Fine-Tuned Risk Management Vehicles In 2025
Last year, the ETF industry saw increased interest in active ETF products and that will continue in 2025, says Kirsten Chang, Senior Industry Analyst with VettaFi.
She says given lower expected returns for both equities and fixed income in 2025, with interest rates holding relatively stable and less dispersion across the board, advisors are seeking sharper tools to place targeted bets on the fixed-income side along the duration and credit-quality spectrum – and for more alpha on the equity side.
“Coming off two consecutive years of 20%-plus gains for the S&P 500, many investors are expecting markets to take a breather in 2025 and advisors to seek out more alpha opportunities and alternative sources of income,” Chang says.
As such, alternative and objective-based strategies within ETF wrappers are well-positioned to capture the increasing trend of actively managing risk and protecting portfolios from greater bouts of short-term volatility, says Paisley Nardini, Managing Director, Portfolio Manager, Asset Allocation Strategist with Simplify.
“ETF vehicles are likely to shine given their accessibility, transparent fee structure and operational ease for most investors,” she says.
Alternative and derivatives-based ETF strategies have grown increasingly sophisticated, with everything from covered calls to leveraged and inverse ETFs now on the table, Chang explains.
Nardini concurs that investors are likely to choose outcome-oriented or objective-based strategies. Recent trends point to greater customization and active risk-management rather than investors sticking with passive ETFs. “While passive ETFs have seen significant adoption, years like 2022 shine a light on the importance of active risk management,” she says.
Private Assets Make Push Into Different Investment Vehicles
Aaron Filbeck, Managing Director, Global Content Strategy, CAIA Association, says he expects growth in the semi-liquid registered fund space will continue.
“In our view, the industry is moving towards ‘everything being an alternative’ rather than a binary ‘traditional versus alternative’ ecosystem,” Filbeck says.
Over the past several years, most of the launches, fundraising and other activity occurred in core real estate strategies and direct lending/private credit, according to Filbeck. This blurring of lines and convergence between public and private markets that began in the early 2020s will accelerate as there are moves to offer more long-dated asset classes, including diversified private-equity offerings and core infrastructure as the product set becomes more diverse.
He points to the growth of offering different assets in new wrappers, such as ETFs incorporating private assets and semi-liquid wrappers investing across public and private markets. “Advisors will not only have access to more alternative products, but many of these products will have hybrid public/private assets within them,” he says.
Chang points to the first-ever private credit collateralized loan obligation ETF launches as an example, with asset managers scrambling to democratize access to a fast-growing but exclusive segment.
Nardini says ETFs may become a preferred choice for alternative strategies, liquid or private, as allocations grow.
“Investors will become more discerning on accessibility, liquidity and price which support these strategies coming to market in ETFs. While interval funds can offer exposure to non-liquid strategies, the operational and administrative hurdles these wrappers carry can be a non-starter for smaller, yet growing firms,” she says.
Regulators in President Biden’s administration were concerned about the lack of transparency in private markets, most notably Securities and Exchange Commission Chairman Gary Gensler, Chang notes. However, with the new President Trump administration now in office, Chang points out there will be a new SEC regime, which could open the door for more expansion. She suggests that the private-debt ETF market will grow faster than private equity, which is significantly more challenging to price.
Despite an SEC that may be open to private-market ETFs, she says there are many in the ETF industry who highlight that there remains the inherent contradiction between illiquid private assets and ETF tradability.
Higher Interest Rates May Affect More Than Just Bonds
Despite the Federal Reserve cutting interest rates in 2024, long-dated interest rates rose, causing prices for bond funds to fall as yields rose. The term premium rise had ripple effects beyond bonds and fixed income.
For Nardini, this move means financial advisors may want to expand their idea of risk management.
“Since the mid-2022 rate hikes, investors have seen bonds fail them in times of equity market stress as the stock-bond correlation resumed a positive relationship, a deviation from what was seen in the post-Great Financial Crisis era. Bonds can still play an active role in meeting income objectives, but investors should consider alternative sources of return for protecting portfolios, as long as inflation fears remain front and center,” she says.
Chang says higher interest rates affect traditionally rate-sensitive cyclical sectors like financials and real estate. Financials may see a benefit as higher rates can support a bank’s net interest income.
However, real estate can be hit by higher mortgage rates, which hampers housing affordability. Elevated rates are also less supportive of commodities, such as gold and oil prices. High-duration technology and growth stocks may decline as higher rates decrease the value of future cash flows. This all plays into the market’s fear that the outperformance of the Mag 7 over the broader markets will shrink, she says.
The Outlook For The Traditional 60/40 Equity/Bond Portfolio
With volatile interest rates and more ways for financial advisors to manage risk, some industry watchers question the traditional 60/40 portfolio’s relevance.
CAIA’s Filbeck says the 60/40 portfolio “certainly” has a place in 2025 as it may be appropriate for certain clients, but he notes it’s just one of many investment strategies available now.
“There are many secular trends that exist in terms of capital formation, bank lending, and inflation that should push advisors to at least consider a wider opportunity set when building portfolios. You can build a strong portfolio in many different ways, and being educated on all of the options is better than ignoring them completely,” he says.
Nardini says rather than relying on bonds as a traditional hedge against equities, both asset classes can support objective-based investing. Still, financial advisors should look beyond growth and income objectives and be aware of the risks of a stock/bond-only portfolio to weather market volatility, such as when both markets fell during 2022. Like Filbeck, she suggests that advisors need to think more expansively about income and portfolio protection.
“Diversified sources of return have become a necessary allocation to protect portfolios in a higher interest rate and inflationary environment,” she says.
Julius Buchanan, Editor in Chief at Wealth Solutions Report, can be reached at julius.buchanan@wealthsolutionsreport.com.
