Anticipated Performance: This ETF Regarding Indexes is Set to Lead in 2025
Anticipated Performance: This ETF Regarding Indexes is Set to Lead in 2025
With 2025 just around the corner, many investors are on the hunt for new investment opportunities or are looking to shift their funds to different sectors. Exchange-traded funds (ETFs) are a fantastic investment option, especially if you don't have the time or resources to monitor a large number of individual stocks regularly.
So, what's the best ETF to invest in for 2025? Let's explore some potential top performers.
Small-cap ETFs
There's been some buzz among analysts that small-cap stocks may outperform large-cap stocks in 2025, marking the first time this has happened in eight years. Among those advocating for small caps is Jefferies analyst Steven DeSanctis, who appreciates their reasonable valuations and strong balance sheets. He also believes that the new Trump administration could be favorable to smaller companies and that mergers and acquisitions are likely to pick up steam in 2025.
Historically, small caps have also performed well during periods of decreasing interest rates. This year, the Fed began reducing rates, and there's an expectation that this trend will continue into 2025.
If small-caps surpass large-caps in 2025, the Vanguard Russell 2000 ETF (VTWO, 1.54%) or its growth and value variants – the Vanguard Russell 2000 Growth ETF (VTWG, 1.90%) and the Vanguard Russell 2000 Value ETF (VTWV, 1.05%) – could be among the top-performing index ETFs that year.
Value ETFs
In 2024, growth stocks have been the star performers, with the "Magnificent Seven" leading the market upward. However, value stocks have historically had their time to shine, too. As an example, in the 1980s and the 2000s, value stocks outperformed growth stocks after the internet bubble burst.
Value stocks may fare better in 2025, due to a more favorable economy and regulatory environment. These types of stocks typically carry debt, so lower rates would be beneficial for them.
If value stocks show growth in 2025, the Vanguard 500 Value Index (VOOV, 0.76%) and the Vanguard Russell 1000 Value ETF (VONV, 0.89%) are worth considering as investments. The latter includes mid-cap stocks, although both are categorized as large-cap value.
Growth ETFs
Large-cap growth stocks have fueled the stock market's growth over the past two years, and there's no indication that this trend will slow down. Eight of the S&P 500's top 10 stocks are classified as growth stocks, and there's a strong argument to be made that Broadcom, which is currently classified as a value stock, should be reclassified as a growth stock due to its opportunities in artificial intelligence (AI).
Growth-oriented ETFs have outperformed both this year and over the past decade. For example, the Vanguard S&P 500 Growth ETF (VOOG, 1.83%) tracks the growth side of the S&P 500 and has an average annual return of nearly 15% over the past decade, as of November's end. The Invesco QQQ ETF (QQQ, 1.64%), which tracks the Nasdaq-100, has also generated a nearly 18% annual return over the past 10 years, as of November's end.
My prediction
I believe that large-cap growth stocks will continue to outperform in 2025. Artificial Intelligence (AI) is still in its early stages, and megacap technology companies are well-positioned to keep capturing this growth opportunity. Many of these stocks are reasonably valued given the growth potential still on the horizon, and some megacap growth stocks, like Nvidia and Alphabet, are even considered undervalued at their current prices.
As long as AI-fueled growth continues, this sector should continue to outperform in 2025. The technology industry's top players, with their substantial resources, are committed to pouring money into AI opportunities, which shouldn't slow down anytime soon.
As for the index ETF that I think will perform the best in 2025, my prediction is the Invesco QQQ ETF. This fund has a slightly more diverse selection of holdings than the Vanguard S&P 500 Growth ETF, which is heavily dominated by Apple, Nvidia, and Microsoft. Some of the other major tech stocks, like Alphabet, Meta, Amazon, and Broadcom (which is not in the S&P 500 Growth ETF), could see growth in 2025.
Given the prediction of continued growth in the technology sector, especially in AI-driven companies, and the diversified holdings of the Invesco QQQ ETF, investing in this ETF could be a strategic move for individuals interested in the finance and investing space, looking to make the most of their money in 2025. Additionally, considering the potential for small-cap stocks to outperform, diversifying one's portfolio by including both small-cap and large-cap growth ETFs might be a wise investment strategy.