Two ETFs that Present Strong Potential to Outperform the S&P 500 by 2025
The S&P 500 index is on track to wrap up an impressive year. By Dec. 27, the market index has surged 25% year on year, and experts are predicting the bull run to persist into 2025, with an estimated value of 6,679, representing a 12% increase from Dec. 27.
Investing in the S&P 500 through an exchange-traded fund (ETF) is often a wise decision, given the index's historical annual average return of 9% with reinvested dividends, despite other funds potentially outperforming the S&P 500.
For those interested in exploring such high-performing funds, continue reading to learn about two ETFs projected to outperform in 2025.
1. VanEck Vectors Semiconductor ETF
One of the top-performing ETFs of the last decade has been the VanEck Vectors Semiconductor ETF (SMH -0.49%), registering a remarkable increase of 800% during that period.
Semiconductor stocks have thrived due to technology's growing dominance in the economy, leading to the emergence of new sectors like mobile technology, cloud computing, cryptocurrency, and now artificial intelligence.
The VanEck Vectors Semiconductor ETF has recorded a 42% year-to-date increase, although it has experienced a slight downturn from its summer high. Contrary to popular belief, the semiconductor sector isn't yet overinflated due to the AI boom, suggesting more potential for growth.
Many of the ETF's major holdings, such as Nvidia and Taiwan Semiconductor Manufacturing, have experienced remarkable growth in 2024, with revenue increases of 94% (for Nvidia) and 39% (for Taiwan Semiconductor Manufacturing), respectively. The former now trades at a price-to-earnings ratio of 33, which, although slightly higher than the broader market, remains relatively affordable.
Although there are concerns about a potential slowdown in AI, there are also indications that this technology is still in its early stages, with significant investments pouring into new factories from the CHIPS Act, expected to favor companies like TSMC, ASML, Intel, and Micron, which are all top-10 holdings of the ETF. Furthermore, cloud software companies are also beginning to see substantial gains from AI, leading to increased spending on chips.
Investing in the VanEck Vectors Semiconductor ETF provides a straightforward means of gaining exposure to AI and is likely to continue its successful performance heading into 2025.
2. SPDR Financial Select Sector ETF
Financial stocks have enjoyed a successful year and have shown considerable strength since the election. The SPDR Financial Select Sector ETF (XLF -1.03%) is up 30% as of Dec. 27, 2024, with 2025 shaping up to provide favorable conditions for the ETF, whose leading holdings include Berkshire Hathaway, JPMorgan Chase, and Visa.
Interest rates are projected to remain high through 2025 as the Federal Reserve has recently forecast only two rate cuts over the next year, bringing the Fed funds rate down to 3.75%-4%. This means that short-term interest rates are expected to remain above 4%.
Additionally, the underlying economy remains robust with low unemployment, positive GDP growth, and inflation now under control. There's also a general optimism surrounding the incoming Trump administration's influence on the sector, with expectations of lower taxes and reduced regulation, likely encouraging more mergers and acquisitions in the investment banking sector.
Higher interest rates and a strong economy are ideal conditions for banks and other financial stocks, allowing them to generate more net interest income and stimulate consumer spending and demand for loans.
With fears of an economic downturn finally abating, financial stocks appear positioned for a strong 2025. Finally, the sector is undervalued, with the ETF trading at a P/E ratio of only 17, significantly lower than the S&P 500. Given that many top holdings are likely to produce solid earnings growth in 2025, the ETF appears to be a sound investment choice for strong performance.
Based on the given text, here are two sentences that contain the words 'finance', 'money', and 'investing':
Investing in the S&P 500 through an exchange-traded fund (ETF) is often a wise decision for those seeking finance opportunities, given the index's historical annual average return of 9% with reinvested dividends. As experts predict the bull run of the S&P 500 to persist into 2025, with an estimated value of 6,679, many individuals are looking for potential investment opportunities in the finance sector.
These sentences can follow the given text by emphasizing the importance of investing in the S&P 500 and predicting a positive outlook for the finance sector in 2025.
