2025 is likely to bring a host of unknown variables into play for investors, including ongoing geopolitical controversies around the world and a rush of new policies and priorities from the U.S. government under the second administration of Donald Trump. On the one hand, defensive plays may appeal to investors cautious about the potential impacts on the markets of escalating turmoil in the Middle East, an isolationist approach to U.S. economic development, and much more.
For those with a higher appetite for risk, though, the broad uncertainty of the investment landscape in 2025 could provide the potential for big plays and, potentially, equally sized rewards. In this environment, exchange-traded funds (ETFs) with a specialized niche focus can allow investors to target a particular part of the market with precision. Keep in mind, though, that these funds tend to be higher in risk than most other ETFs, even in periods of relative stability in the market.
Super-Charged Exposure to the Market With Built-In Downside Protection
The Direxion HCM Tactical Enhanced U.S. ETF (NYSEARCA: HCMT) is an actively managed fund-of-funds that employs an unusual approach: HCMT either invests in a leveraged U.S. equities position of up to 200% of net assets or takes a non-leveraged, all-cash or cash equivalent approach. The determination is made according to an investment model by subadvisor Howard Capital Management that attempts to gauge which of the two approaches may be more advantageous. HCMT may toggle between these two modalities as often as every day.
This fund puts an unusual spin on the approach leveraged ETFs often take, which might be described as "all-in all the time." Typical 2x or 3x leveraged funds pick an investment approach and stick to it—investors usually trade in or out of the fund on a daily basis to avoid skewing long-term performance as the fund resets.
With HCMT, investors have a fund that can take a highly aggressive leveraged approach or a passive, defensive strategy, depending on the market. This may make investors more likely to park assets here for longer than they would for other leveraged funds, although compounding risks may still remain. However, the fund's approach to managing downside risk is helpful—particularly given that most leveraged funds offer no protection at all.
Ethereum Focus, With Risk Management
Like HCMT, the Bitwise Ethereum Strategy ETF (NYSEARCA: AETH) is designed to fluctuate between a higher-risk, more aggressive investment strategy and a much lower-risk, more stable one, depending upon the state of the market. While HCMT targets equities and takes a broad approach to consider the S&P 500 and the NASDAQ-100, AETH looks to the cryptocurrency space and, more specifically, to Ethereum.
Though ether is not nearly as ubiquitous as Bitcoin tokens, the Ethereum network remains the favorite among crypto developers looking to launch applications, NFTs, or tokens utilizing smart contracts. This makes Ethereum a likely hub of activity any time major developments in the cryptocurrency space occur.
AETH invests entirely in CME Ether Futures during periods of market growth. It then shifts to a conservative U.S. Treasuries-based approach during downturns or periods of volatility. Similar to HCMT, this rotating strategy means that AETH attempts to take a highly risky, speculative environment and offer some protection against downside risk. Like many other crypto-based ETFs, AETH does not invest in ether directly—for some, the less direct option of exposure through futures provides an appealing bit of distance from the volatile spot market.
AETH has low assets under management, with under $11 million as of December 26, 2024. Still, the defensive option should appeal to buy-and-hold investors who are less concerned with daily trading liquidity.
Capitalize on a Booming Economy
The MicroSectors Travel 3x Leveraged ETN (NYSEARCA: FLYU) provides investors with an interesting way to make a bullish bet during a strong economy. The fund aims for 3x daily exposure to an index of stocks involved in the travel industry. Because consumers are likely to increase their non-business travel expenses when the economy is doing well, this fund gives investors a targeted way to capitalize on periods in which customers have more cash in their pockets.
FLYU investors do end up paying for the leveraged exposure, as the fund has an expense ratio of 0.95%. It also has a very small asset base and trading volumes as of late December 2024, which may pose a problem for investors keen to rotate in and out of a FLYU position daily to align with the exposure resets.
