Will 2025 be the year of diversification in equities?
Introduction
With three months into 2025 and a new administration in Washington, it is apparent that macroeconomic and investment themes this year will be different from those of 2024, which was marked by relatively low equity volatility and higher-than-average returns in U.S. equities, driven primarily by mega-cap stocks.
In 2025, risk management in the form of portfolio diversification is becoming a central theme as investors look to derisk the weight of U.S. equities and overweight less-correlated markets. Alternative asset classes such as commodities and cryptocurrency may play a bigger role this year. Managing shifts in trade policy and the uncertainty it creates requires a careful analysis of the geographic revenue exposure of sectors.
Watch five key trends playing out in equities and alternative investments in 2025.
I. Diversification within the U.S. equities
U.S. equities set new record highs last year, and the weight of U.S. equities as a percentage of global equity comprised nearly 67%1 by the end of 2024, up from 62.57% in 2023. Within U.S. equities, the combined weight of the top five securities in the S&P 500 reached nearly 29% on December 31, 2024.2
The dominance of U.S. equities combined with the heavy concentration in the top five names is a reminder for investors to proactively manage concentration risk and diversify within the equity asset class itself as well as in other less correlated asset classes.
To diversify within large cap U.S. equities, E-mini S&P 500 Equal Weight Index (EWF) futures can be an alternative way to reduce concentration among mega-cap stocks. The underlying S&P 500 Equal Weight Index allocates equal weight to all the constituents. During market selloffs led by mega-cap names, the S&P 500 Equal Weight Index tends to decline less than the cap-weighted S&P 500. As an example of its ability to reduce risk, on January 27, 2025 S&P 500 declined -1.46% on a price return basis, led by Nvidia, when investors learned of the Chinese AI company, DeepSeek. S&P 500 Equal Weight Index posted +0.02% on the same day.
Trading volume and client interest in E-mini S&P 500 Equal Weight Index futures have grown considerably since the contract’s launch in February 2024. As of January 31, 2025, open interest stands at over 17K ($2.6B notional).
Diversification with less-correlated markets
II. International equity
In 2025, investors are looking to international equity markets for diversification of U.S. equities. Within developed markets, appetite for Japanese equities continues to grow. An economic rebound and the return of inflation delivered double-digit gains for Japanese equities in 2023 (28.24%) and 2024 (19.22%)3. Moreover, the rolling three-year correlation between U.S. and Japanese equities is declining in recent months (see Exhibit 1).
Exhibit 1: Rolling three-year correlation between Nikkei 225 and S&P 500
Source: CME Group. Data as of 01/31/2025. Correlation calculated using monthly price returns in USD.
Nikkei 225 futures provide an efficient way to gain access to Japanese equity markets. Micro Nikkei 225 contracts were introduced in October 2024, and CME Group now lists JPY- and USD-denominated Nikkei 225 futures in standard, E-mini and Micro sizes, providing market participants a range of contract sizes to meet their needs.
III. Commodities
2024 was one of the turning points for commodities, as both the S&P GSCI and Bloomberg Commodity Index (BCOM) posted positive returns (see Exhibit 2). The bull run in commodity markets could very well continue into 2025 as the implications of geopolitical tensions, shifts in trade policies and inflationary pressures remain elevated. A research report by Goldman Sachs is forecasting total returns of 10% for BCOM and 12% for the S&P GSCI for 2025.4
Exhibit 2: Returns of commodity indices in 2024
Spot Return
Total Return
Excess Return
S&P GSCI
2.61%
9.25%
3.79%
Bloomberg Commodity Index (BCOM)
6.27%
5.38%
0.12%
Source: Bloomberg, S&P Dow Jones Indices. Data as of 12/31/2024. Returns in USD.
For market participants looking to commodities to hedge against inflation and for portfolio diversification, maintaining a broad exposure across different commodity sectors – Agriculture, Energy and Metals – is important to achieving desired investment outcomes.
Index choice matters in commodities. S&P GSCI is production weighted and does not apply sector weight constraints. As a result, the index tilts heavily toward energy. Bloomberg Commodity Index is a combination of production and liquidity weighting while maintaining equal weight across sectors. As a result, the two indices can have different risk/return profiles depending on which commodity sectors are driving the performance.
CME Group lists futures on both commodity indices as well as options on BCOM futures, allowing market participants to access commodity beta efficiently, hedge risks and express directional views. Adoption of the CME Group commodity complex has grown significantly since 2020, with open interest (OI) growing from nearly $900M to almost $6B in notional basis as of January 31, 2025.
IV. Managing trade and policy uncertainty
With the new administration in Washington, trade and fiscal policies and financial regulations are changing, creating uncertainty in markets, both domestic and international. The exact magnitude of tariffs and the goods on which tariffs are to be imposed are still evolving.
A good way to assess the potential implications would be to determine the percentage of foreign and domestic revenue received by companies in each Global Industry Classification Standard (GICS) sector. A S&P Global study shows that sectors such as financials, utilities, health care and real estate have the highest percentage of domestic revenue while sectors such as industrials, energy, materials and information technology have a higher percentage of foreign revenue5 (see Exhibit 3).
Sector performance since the presidential election has been mixed (see Exhibit 4), with a wide dispersion of returns observed among the sectors. Industrials, consumer discretionary and financials posted double-digit gains while materials, health care and real estate are in the red. The wide dispersion of returns may continue for the remainder of 2025 as the market digests evolving trade policies and their impact on sectors.
Exhibit 3: Domestic revenue exposure of sectors
Source: Data provided by S&P Dow Jones Indices, LLC. Data as of 01/31/2025.
As trade related events unfold, Sector futures and options are important tools to make tactical adjustments as well as medium term repositioning. Over the past 6 years, the adoption of listed Sector futures and options by market participants has increased significantly. In 2024, average daily volume (ADV) reached a record of 21K contracts, up 13% from 2023, and open interest (OI) also reached a new record high of 405,140 on December 17 across 19 sectors. The adoption is expected to continue growing in 2025 amidst changing trade policies and wide sector return dispersion.
Exhibit 4: Sector performance since the presidential election
Source: S&P Dow Jones Indices, LLC. Data from 11/04/2024 to 02/24/2025. Daily price returns in USD.
V. Growth and innovation in cryptocurrency
2024 witnessed new developments in the cryptocurrency ecosystem with the launch of spot bitcoin ETFs and bitcoin hitting $100,000 for the first time.
With the administration expected to develop new frameworks and regulations around cryptocurrencies in 2025 and beyond, further innovation and growth are anticipated in this space. Against this background of regulatory change, institutional adoption of cryptocurrency is expected to rise as crypto infrastructure improves and the product landscape evolves, with different types of investment vehicles coming to market.6
In 2017, CME Group introduced cash-settled Bitcoin futures, providing investors with regulated exchange traded derivatives to invest and manage risk in cryptocurrency. Since then, the exchange has continuously innovated and expanded the crypto product portfolio to give investors more choices, flexibility and liquidity. In addition to offering Micro Bitcoin contracts, to meet growing demand for even smaller-sized and shorter-dated Bitcoin contracts, CME Group launched Bitcoin Friday futures (BFF) in September 2024 which are cash settled, 1/50 of a bitcoin and expire every Friday. Exhibit 5 shows the growth in volume and open interest (OI) of Bitcoin, Micro Bitcoin and Bitcoin Friday futures.
2025 could possibly be the year that cryptocurrency becomes mainstream as all the necessary elements required in maturation of an asset class – such as clear regulatory frameworks, robust infrastructure, availability of different investment vehicles and risk management capabilities – align.
Exhibit 5: Bitcoin, Micro Bitcoin and Bitcoin Friday futures (BFF) quarterly ADV and average open interest
Source: CME Group. Data as of 12/31/2024.
Conclusion
As always, with a new administration in Washington, there will be new regulations, new investment opportunities and new risks to manage. Market uncertainty has heightened in 2025 amid shifts in trade policy, inflation remaining stubbornly elevated and investors becoming cautious of the outsized returns generated by mega-cap stocks. Diversification as a risk management tool is becoming central to investing in 2025.
Through a range of futures and options on Equity and alternatives, CME Group provides investors with the toolsets to help manage risk and capitalize on opportunities with greater precision.
References
1Based on the weight of MSCI USA in MSCI All Country World Index (ACWI) as of 12/31/2024 and 12/31/2023.
2The combined weight of Apple, Nvidia, Microsoft, Amazon and Alphabet
3As measured by price returns in local currency Yen of Nikkei 225 Index.
4Goldman Sachs, Commodity Investing 101. February 28, 2025.
5Anu Ganti, “Locally Sourced but Globally Minded”, S&P Dow Jones Indices LLC.
6Price Waterhouse Cooper. 6th Annual Global Crypto Hedge Fund Report. Oct 2024
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
Derivatives are not suitable for all investors and involve the risk of losing more than the amount originally deposited and any profit you might have made. This communication is not a recommendation or offer to buy, sell or retain any specific investment or service.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
CME Group Inc. does not have control over the content, accuracy, quality, or legality, of any third-party product, service, or content advertised on this webpage. The presence of such advertisements on this webpage does not signify any association, partnership, or endorsement of the third-party or its content by CME Group Inc.
