I’m a big fan of investing in individual stocks and truly believe that a well-constructed stock portfolio can outperform the overall stock market. At the same time, there’s value in putting some of your investment dollars on autopilot with top-quality index funds.
Index fund ETFs can not only give you diversified exposure to an entire portfolio of stocks in one investment vehicle, but can also generate some pretty impressive returns over long periods of time. With that in mind, while some of my favorite stocks (particularly high-yield dividend stocks) seem like excellent values right now, I plan to gradually buy shares of three ETFs in particular over 2025.
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If I could only own one investment it would be the Vanguard S&P 500 ETF (NYSEMKT: VOO). This is Vanguard’s flagship S&P 500 index fund. As the name suggests, this ETF tracks the S&P500 (SNPINDEX: ^GSPC)which is widely considered the best measure of how the US stock market is performing.
This ETF has an expense ratio of 0.03%, which means that if you invest $10,000 in the fund, only $3 goes towards annual investment costs. Over a long period of time, the S&P 500 has delivered an average total return of about 10% annually. For context, this means that a $10,000 investment in the ETF could be worth about $175,000 over 30 years, with no maintenance required along the way.
In early 2024, small-cap stocks were trading at the lowest price-to-book value compared to large-cap stocks since the late 1990s. And over the year, the valuation gap has widened even more, thanks to the outperformance of big tech stocks and interest rates not falling as much as experts predicted.
Now the average component of the Russell 2000 small-cap index trades at a price-to-book ratio of 1.9, compared to 4.7 for the typical S&P 500 stock. With interest rates finally starting to fall and a potentially pro-growth environment under the incoming Trump administration, small caps could see significant tailwinds. That’s why the Vanguard Russell 2000 ETF (NASDAQ: VTWO) is my overall top ETF pick for 2025.
To be clear, I think artificial intelligence (AI) is a enormous opportunity and could well become the most important technological trend of my lifetime. However, I am good at evaluating banking stocks, real estate companies and e-commerce companies, to name a few. The best AI capabilities are, to be honest, not in my wheelhouse. Every good investor should know their circle of competency, and AI stocks are a little outside of mine.
