Advisors: Spice Up Plain-Vanilla ETFs for Strong Returns in 2025

When it comes to asset allocation in 2025, plain-vanilla indexed strategies are looking very 2024.

Lofty market valuations, combined with new leadership in Washington, have financial advisors on their toes, focused on niche categories, themes and alternatives to prepare clients for what lies ahead.

“We're seeing a definite shift away from plain vanilla indexed investing, and it's something we're paying close attention to,” said Max Stamakun, a financial advisor at Israilov Financial in San Francisco.

“Factors like restrictive monetary policies and geopolitical instability are making the market more volatile, which challenges the effectiveness of traditional strategies,” he added.

With the SPDR S&P 500 ETF Trust (SPY) finishing its second straight year of gains in the 25% range, thanks largely to the record-setting performance of a handful of high-flying tech stocks, the caution flags are waving across the wealth management space.

“My thesis is that 2025 is the year momentum dies,” said Paul Schatz, president of Heritage Capital in Woodbridge, Connecticut.

Schatz, who expects two market corrections of at least 10% in 2025, added, “This will be a hard year to make a lot of money, and plain vanilla will not be rewarded.”

Spicing Up Plain Vanilla ETF Portfolios

“I think investors will need to find unique and unusual ways to make money outside the indices, and outside the AI stocks,” Schatz predicted.

While Nvidia Corp., as the poster child of outperformance, is off to another strong start this year, financial advisors are looking for diversification away from the lopsided index weightings.

“It’s a well-known challenge that broad market-weighted indices are becoming highly concentrated,” said Jen Wing, chief investment officer at GeoWealth in Chicago.

Citing that the top 10 stocks in the S&P 500 combine for nearly 40% of the index, Wing noted, “Financial advisors are increasingly exploring alternative investments as a way to complement low-cost market cap ETFs with alternatives that offer the potential for both enhanced returns and diversification.”

To be clear, nobody is suggesting a wholesale shift away from the cheap market beta that can be achieved through broad market-indexed ETFs. However, advisors say, at this point in the market cycle, greater emphasis needs to be on satellite positions.

“While plain-vanilla ETFs certainly have a place in investor portfolios, particularly for those looking for low-cost exposure to liquid market beta, we continue to believe an allocation to private markets is appropriate for investors with long-term investment horizons,” said Matt Malone, head of investment management at Opto Investments in New York.

“Research has shown that more companies, particularly those in the innovation economy, are staying private for longer,” he added. “Innovations in private credit and other areas have enhanced the ability to finance companies and other assets outside traditional public markets.” 

Of course, there are different ways to look at two years of strong market returns.

Noah Damsky, principal at Marina Wealth Advisors in Los Angeles, said some portfolio shifts beyond the broad market indexes are driven by “greed.”

“This is exactly what happens when index returns soar … investors get bored with index returns,” he said. “They start to think strong returns are the new normal and making money is easy, so they look to take more risk and do more complicated things because they have [fear of missing out] of making even more money.”