Investing in Stocks and Bonds Through ETFs May Pay Off in 2025, According to Blackrock

This week’s ETF Wrap explores strategies for investing in equities in 2025, following a late-2024 surge into equity-focused exchange-traded funds (ETFs). BlackRock’s Kristy Akullian provided insights on navigating the stock and bond markets this year during a recent interview.

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BlackRock recommends a pro-risk approach for early 2025, favoring an overweight allocation to equities in a traditional 60/40 portfolio (60% stocks, 40% bonds). Akullian, the head of iShares investment strategy for the Americas at BlackRock, emphasized the firm’s preference for U.S. equities over international markets, with a strong focus on high-quality stocks. She highlighted the iShares MSCI USA Quality Factor ETF (QUAL) as a key option for gaining exposure to these high-quality U.S. equities.

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Akullian noted that many of the top-tier U.S. stocks lean more toward growth than value. Despite growth stocks significantly outperforming value equities in 2024, Akullian believes growth has the potential to maintain its dominance in 2025.

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For example, the iShares Russell 1000 Growth ETF (IWF), which has substantial exposure to major technology companies, delivered a total return of 33.1% in 2024, compared to the 14.2% return of the iShares Russell 1000 Value ETF (IWD). While growth is expected to remain strong, Akullian acknowledged that certain opportunities could still be found within value stocks.

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BlackRock anticipates that interest rates will remain elevated for an extended period in 2025, a factor that could continue to benefit growth stocks. The current economic environment is marked by high interest rates and uncertainty surrounding U.S. trade and immigration policies, as well as concerns about funding the federal deficit with increased Treasury issuance. This backdrop could influence the direction of bond yields and equity markets.

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The iShares MSCI USA Quality Factor ETF (QUAL) is particularly appealing for its sector-neutral and diversified approach, Akullian explained. Unlike some growth funds that heavily emphasize technology, this ETF focuses on identifying the highest-quality companies across various sectors.

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Additionally, the iShares U.S. Equity Factor Rotation Active ETF (DYNF) offers a dynamic strategy for navigating the stock market, rotating its exposures to different attributes based on changing market conditions. Currently, this fund avoids small-cap stocks, while favoring momentum and high-quality factors.

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While growth stocks are likely to remain in the spotlight, Akullian sees potential opportunities within value equities, particularly in industries that could benefit from deregulation. For example, the iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI) includes holdings such as Goldman Sachs, Morgan Stanley, and S&P Global, which may see gains from a potential deregulatory agenda under the new White House administration. Deregulation could stimulate increased mergers and acquisitions activity, benefiting these firms.

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As 2025 begins, enthusiasm for the ongoing U.S. bull market remains strong. In 2024, investors poured record amounts into equity ETFs, especially during the final two months of the year, with consecutive monthly inflows surpassing $100 billion. Despite this optimism, the percentage of equity ETFs trading significantly above their 200-day moving averages dropped from almost 50% in late November to just 1% by early January.

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The third year of a bull market often poses challenges. Historically, bull markets start with a sharp recovery from lows but become less straightforward to sustain by year three. The current bull market, which began in October 2022, has now surpassed its two-year anniversary, raising questions about the durability of further gains.

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Todd Sohn, an ETF strategist at Strategas, analyzed the performance of the S&P 500 and the small-cap-focused Russell 2000 over their first three years in a bull market. His research suggests that while the initial phase of a bull market often delivers substantial gains, subsequent years can see increased volatility and slower progress.

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For investors seeking portfolio diversification, the bond market offers both opportunities and challenges. Uncertainty surrounding the incoming administration’s policies and their influence on Federal Reserve decisions adds complexity. A recent rise in bond yields has created volatility, particularly at the long end of the yield curve.

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Akullian recommended focusing on the “belly” of the yield curve, spanning three to seven years. The iShares 3-7 Year Treasury Bond ETF (IEI) offers exposure to this segment and has performed better than long-term bond funds. While the iShares 20+ Year Treasury Bond ETF (TLT) suffered an 8.1% loss in 2024, the IEI posted a modest gain. For investors seeking a more flexible approach, the iShares Flexible Income Active ETF (BINC) actively invests across global bond markets and delivered a total return of 5.8% in 2024.

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The ETF market continues to expand with innovative offerings. Alger Russell Innovation ETF (INVN), launched by Fred Alger Management, targets the most innovative companies in the Russell 1000 index. BlackRock has also introduced the iShares Large Cap Max Buffer Dec ETF (DMAX), which aims to track the price return of the iShares Core S&P 500 ETF (IVV) while providing downside protection and capped upside.

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As investors navigate 2025, strategies emphasizing high-quality U.S. equities, growth-focused funds, and targeted bond exposures could offer compelling opportunities. However, the potential for volatility underscores the importance of a diversified and adaptable investment approach.

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