These ETFs offer a less risky approach to investing in the expected stock market recovery in 2025

Investors should look beyond the most popular large-cap stock funds next year, but that doesn’t mean they should become overly cautious, according to Astoria Portfolio Advisors. John Davey, CEO and chief investment officer of Astoria, told CNBC that the huge amount of money that has flowed into index funds tracking the S&P 500 this year is a sign that investors should actually look elsewhere in the stock market for better returns on their money. “It’s hard for me to be overly optimistic,” Davey said.

Astoria helps build ETF portfolios for its clients, as well as advising on some of its own funds. The company also released a list of the best ETFs for next year, with this year’s showing a search for profitable companies outside of the big tech stocks that have fueled much of this bull market over the past two years.

Custom Indices

Two of the funds Astoria recommends are ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) and WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS). Each tracks customized indexes and has performed solidly in 2024, despite lagging the S&P 500. OUSM is up about 20% year-to-date, while DGRS has gained about 18%. Part of the shift to small companies comes from the argument that large-cap indexes and some of the biggest tech stocks look overvalued, leaving some companies outside that group with more attractive valuations.

“There are actually a lot of companies that are growing faster than Mag 7,” Davey said.

The impact of Donald Trump’s election is also evident on the list. Astoria includes the Invesco KBW Bank ETF (KBWB) and the AltShares Merger Arbitrage ETF (ARB), which could benefit from a lighter regulatory framework in the financial sector and fewer regulations on mergers and acquisitions. “If the Trump administration radically changes regulation, there should be a boom in banks and a boom in merger arbitration,” Davey said.

The Invesco KBW fund already appears to be starting to rally, in part because of the election results, and is up about 14% in November. However, the AltShares fund was little changed this month and is a small ETF, with assets under $100 million. The fund, which effectively bets that announced mergers will be completed to collect the “arbitrage” spread between the proposed price and the current price of the target, could become more popular if the changes in administration lead to a wave of deals.

The fund’s website says it is designed to offer low volatility and low correlation with stocks and bonds, so it may not be a big winner if the broader market continues to rise.

Catching up with crypto

One of the biggest stories in ETFs in 2024 is crypto funds, with Astoria having the Bitwise Ethereum ETF (ETHW) on its list for next year. The Bitwise fund is the fourth-largest spot ether ETF, behind two products from Grayscale and the iShares Ethereum Trust ETF (ETHA).

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Ether funds haven’t been as successful as their bitcoin counterparts, but they may be on their way to catching up. “Ethereum is about 36% below its all-time high, so I think there’s more room to go than bitcoin,” Davey said Tuesday, ahead of the cryptocurrency’s big rally before Thanksgiving.

However, Davey said he prefers ETFs with more diversified crypto exposure. Investors may get some options in that direction soon, as asset managers prepare to launch new crypto funds if the Trump administration, as expected, turns out to be more friendly to the industry.