In the ever-evolving landscape of the global economy, fluctuations in interest rates have surfaced as pivotal factors that shape investment decisions. As local yields on ten-year government bonds dip below 2%, we are officially entering an era characterized by domestic interest rates of 1.0 or lower. This seismic shift resembles a profound transformation in financial markets, profoundly rewriting the underlying principles of traditional investment while simultaneously presenting fresh opportunities and challenges for Exchange-Traded Funds (ETFs). The recent report from Huabao Securities, in collaboration with Wall Street Insights, forecasting the ETF landscape for 2025 illuminates a pathway for investors navigating this sea of uncertainty.
During periods of high-interest environments, fixed-income products, owing to their stability, have historically been the go-to choices for conservative investors. Investment offerings with rigid redemption features provided an additional layer of comfort. However, the dawn of the low-interest era has significantly altered this narrative. Fixed-income yields continue to wane, often failing even to cover operational costs, leading to a widespread contraction in market size. Concurrently, the once-celebrated focus on domestic growth-oriented assets and the era of active fund managers are now facing rigorous assessments. In the new market climate, the pace of growth for domestic growth assets has slowed, and active management funds are increasingly challenged in obtaining excess returns that were once within reach. The former darlings of the investment community are now experiencing a lack of luster.
In light of such market upheaval, investors are scrambling to find new avenues for investment. The report from Huabao Securities furnishes proactive recommendations for those forging ahead.
Among these recommendations, high-yield assets emerge as crucial players, specifically local high-dividend stocks and Real Estate Investment Trusts (REITs). High-yield stocks promise investors a stable dividend income, a particularly precious commodity in an environment characterized by low interest rates. Simultaneously, REITs enable everyday investors to partake in large-scale real estate investments by redistributing income generated from rent and property portfolios. However, with stringent limits on cross-border investment quotas, these assets may also fall prey to China's version of 'carry trading,' potentially amplifying price volatility. For instance, significant capital inflow into high-yield stocks could rapidly inflate prices, yet any capital withdrawal could result in an equally swift decline, necessitating careful investor vigilance.
Global growth assets deserve equal attention, especially stocks from key players in the global tech supply chain, as well as equities from countries and regions demonstrating unexpected economic growth. The tech industry's rapid evolution has accompanied an expanding global supply chain. Take artificial intelligence (AI) as a compelling example. From upstream sectors producing computational chips like NVIDIA’s A100 and H100, renowned for their prowess in AI processing, to midstream algorithmic frameworks such as TensorFlow and PyTorch—which provide the necessary infrastructure for AI model development and training—down to downstream applications in smart security and autonomous vehicles, the full breadth of this organic tech sector is ripe for investment. Hikvision’s smart surveillance systems exemplify the myriad of opportunities unfolding throughout the wider tech landscape.
In an investment portfolio, alternative assets that demonstrate low correlation with conventional stocks and bonds—such as gold—also hold significant importance. Traditionally regarded as a safe-haven asset, gold's value preservation capabilities are accentuated during periods of economic instability and market volatility. Historical trends in gold prices illustrate this dynamic: between 1973 and 1980, following the collapse of the Bretton Woods system and a dramatic devaluation of the dollar, gold spiked from $35 to $850, entering a bull market over the ensuing decade. Again, from 2000 to 2011, spikes in oil prices, U.S. inflation, and the European debt crisis precipitated another dollar depreciation, with gold soaring from $251 to $1,920, marking twelve years of growth. As we stand in this low-interest landscape, factors including global quantitative easing policies and recession fears propel gold prices upwards. When stock markets fluctuate and bond markets face turmoil, gold often maintains stability or even appreciates, serving as a bulwark against risk in the investment portfolio. Nevertheless, such assets can exhibit significant price volatility, and given that many have maintained robust positions for an extended duration, investors must temper their expectations regarding future price appreciation.
From a broader macroeconomic perspective, a rebalancing of global equity assets is likely on the horizon for 2025-2026. By the end of 2024, within the FTSE Global All Cap Index—a benchmark for global equities—the U.S. stock market's share may approach 70%. This excessive concentration serves to intensify pressure for the market to rebalance in the opposite direction. In this forthcoming process, stocks from Europe and China stand to benefit substantially. For investors that prioritize asset allocation, this forthcoming phase represents a prime opportunity to recalibrate portfolios and seize returns.
In the ETF market specifically, shifts in asset allocation strategies are paired with continuous innovation in investment methods. Recently, actively managed ETFs have gained significant traction. While passive investment strategies flourish in the Chinese market, the U.S. has seen a remarkable surge in the issuance of active ETFs, approaching parity with passive options. Within the realm of active ETFs in the U.S., three distinct camps emerge.
The 'star' camp, epitomized by figures like Cathie Wood—often referred to as "Wood the Stock Whisperer"—brings to the forefront a self-propagating glamour, adept at tapping into viral market momentum. In this era of rising retail investors, they employ ETFs to pursue aggressive investment styles, aiming to replicate narratives of wealth generation. Wood's managed funds frequently focus on emerging tech sectors, boldly investing in companies with high growth potential and attracting substantial investor followings.
Meanwhile, the 'transformer' group, represented by Dimensional Fund Advisors, is an established player within traditional closed-end funds that actively seek to innovate. They are working to optimize and streamline conventional strategies into ETF formats, capitalizing on active management advantages. This transition not only enriches investor choices but also infuses fresh life into traditional strategies within the ETF marketplace.
Lastly, the 'disruptor' faction, exemplified by JP Morgan's JEPI, fosters market exploration through innovative products and strategies. JEPI utilizes a unique investment model aimed at providing steady dividend income aligned with the needs of income-seeking investors.
An increasing number of investors are beginning to recognize the potential of synergistically utilizing active and index-based ETFs. While index ETFs provide a foundational exposure to the broader market, allowing investors to share in overarching market gains with cost-effectiveness, active ETFs act as satellites, driving alpha returns in specific areas. This dual-strategy approach becomes imperative, particularly during industry upswings while leveraging active management to mitigate risks. The evolving paradigm of combining 'active + passive' approaches is steadily gaining steam as a crucial investment trend for the future.
As we navigate the year 2025 marked by persistently low-interest rates, the arena of ETF investments is replete with opportunities and challenges. Investors must diligently monitor market shifts, aligning their strategies with their personal risk tolerance and investment objectives. Careful deliberations are essential in both asset allocation choices and innovative investment methodologies. By maintaining a keen focus on high-yield local assets, growth opportunities overseas, alternative assets, and judicious deployment of both active and index-based ETFs, investors can position themselves for asset preservation and appreciation, steadily advancing through the investment currents of this low-interest era.