Equity funds soared in 2024, but 2025 outlook is volatile

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Equity exchange-traded funds (ETFs) around the globe had a banner year in 2024, however 2025 will likely be more volatile with the United States launching a global trade war that could upset stock markets.

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But that doesn’t mean investors should shun equities this year, particularly young investors with years of time in the market to benefit from compounding, experts say. Instead, they should aim to create a balanced and diversified portfolio that can weather the challenges of unpredictable markets.

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“As I think you know, 2024 was a fantastic year for virtually all asset classes, and 2023 wasn’t too bad either. So, we are really coming off two outstanding years,” said Dan Bortolotti, a portfolio manager with PWL Capital Inc.

Bortolotti looks to the Vanguard All-Equity ETF Portfolio as a benchmark for equities, a well-diversified fund holding about 30 per cent Canadian equities, 45 per cent U.S. equities and 25 per cent international equities. The fund gained 25 per cent in 2024 and 17 per cent in 2023.

“All asset classes [including equities and bonds] did well in 2024 but as has become pretty common over the last few years, the U.S. has led the way with the highest returns driven primarily by big tech stocks,” he noted. That includes tech giants Microsoft Corp., Apple Inc., Alphabet Inc., Meta Platforms Inc., Amazon.com Inc., Nvidia Corp., and Tesla Inc.

But that strong growth is not guaranteed to continue in 2025 with the uncertainty of a trade war brewing led by U.S. President Donald Trump implementing tariffs. “You need to be prepared that it’s probably going to be a choppy ride,” Bortolotti said.

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That doesn’t mean investors should try to time the markets and dive in and out as markets fluctuate, he said. Market prices are based on expectations for the future and average investors can’t really keep up with all the information flowing.

“You are not going to outsmart the market,” he said. “It’s very important for young investors, and for all investors, to just kind of accept that if you want to capture all the returns that the markets have to offer, the best way to do so is to get exposure to the market at the lowest possible cost and then get out of the way.” Only a select number of top investment managers beat the market regularly, he said.

Young people who are starting to invest have so many “so-called experts” dominating their social media feeds who might give free but bad investment advice or focus on the latest investing trend. Meanwhile, simply buying “an index fund that captures everything the market will return minus a very small fee … doesn’t take any particular skill” and you’ll have better investment returns than actively trading, Bortolotti said. “It’s boring though.”

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A young investor can set up good investing habits by automatically putting aside regular contributions, even if that’s only $50 or $100 a month, and benefit from the effects of compounding, where the money your investments earn also earns money and that grows over time. That could also mean investing in your employer’s retirement savings plan. The compounding doesn’t show up significantly early on, but it does as time goes on, Bortolotti said. “You really get that momentum behind you and the compounding will happen.”

While it may be tempting to jump in and out of the market as it moves up and down, the likelihood is that you will simply sell low and buy high – you’ll wait too long to get out and will buy back in as prices have already risen off the lows, and that will deteriorate returns, Bortolotti said.

It’s better to be a disciplined buy-and-hold investor who invests regularly and rebalances your portfolio of equities and fixed-income investments at set intervals – so when equities get to be too much of your portfolio (which means prices are high) you sell some and buy fixed-income investments, he said.

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In fact, in 2024 balanced funds, which include both equities and fixed-income investments, did well, with the majority being top quartile performers, and earned an average annual return of 14 per cent, said Ian Tam, director of investment research with Morningstar Canada.

There are now about 1,590 ETFs listed in Canada, a huge number when you consider that 10 years ago there were only 308, he said. Last year, about 30 per cent of equity funds were top quartile performers and had an average annual return of 20 per cent. In 2024, 55 per cent of actively managed ETFs beat their peers, while 53 per cent of passive equity ETFs did the same. Passive ETFs still rule, representing 62 per cent of assets under management.

About two-thirds of thematic ETFs — those that follow a certain sector — did not beat their peer groups. Less than half of smart beta ETFs, which use a different weighting strategy than traditional cap-weighted indexes and blend active and passive strategies, beat their peers. Six of seven technology-themed ETFs did better than their peers.

“It wasn’t worthwhile getting fancy in 2024,” with broad-based ETFs outperforming, Tam said.

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With more younger investors opening do-it-yourself (DIY) investment accounts “their preferred vehicle is probably going to be ETFs,” he said, which are also easier to trade and have lower fees than mutual funds.

ETF fund flows were also strong in 2024 with Canadians investing $76 billion, 45 per cent higher than the previous annual inflow record set in 2021, according to data from National Bank of Canada Financial Markets. There are now $519 billion in ETF assets under management, up 22 per cent over the past five years.

Equity ETF flows dominated inflows with $44.6 billion, and nearly half of that went to U.S. equity ETFs, 20 per cent to Canadian and 31 per cent to International ETFs.

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