Passive ETFs need active consideration
As geopolitical tensions rise stoking investors’ fears of a recession in the US, core drivers of returns should remain in focus for investors and advisers selecting ETFs, according to Morningstar.
Friday, March 14th 2025, 6:00AM
by Kim Savage
The research house’s February ETF data shows that even amid a turbulent backdrop, US stock ETFs continue to grow, bringing in USD$66 billion for the second month of the year. In the battle to be the world’s largest ETF between S&P 500 trackers Vanguard VOO and SPDR SPY, Vanguard overtook SPDR during February, only for SPDR to return to the top spot the following day.
Performance-wise international stock ETFs saw gains in February, buoyed by a rally in Chinese stocks, while most US ETFs saw losses, with tech companies which have been the drivers of recent gains, taking a tumble.
“One of the biggest problems that investors run into, and potentially something that people are running into over the last couple days with what's been happening in markets is, if you don't understand what will cause this ETF to perform well or perform poorly, then you're going to end up making decisions based purely on performance, without understanding what to attribute that performance to,” says Mark LaMonica, Morningstar Head of Personal Finance.
Speaking at an investor event on traditional passive ETFs, which remain the most popular types, LaMonica says looking at what factors will cause an ETF to do well is vital to making a sensible choice for portfolio additions.
“When technology shares fall in the US, you'll understand how that's impacting your ETF.
“You'll understand why your ETF is going down, and that means you can make an actual decision, not to sell the ETF because it's going down, but sell because my hypothesis and theory has changed.”
In an uncertain environment, says LaMonica, valuations and earnings growth can be among the key drivers to look out for.
“Investors are obviously getting nervous about tariffs and uncertainty and everything else. That generally means people pay less. Valuation levels come down. So we've certainly seen that happen.
“I think in terms of earnings growth, we have to see what will happen. But obviously, if there's a recession, you would expect earnings growth to go down.”
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