My Preferred Vanguard Index ETF Selection for 2025
It seems like 2024 is shaping up to be another profitable year for the stock market, with the S&P 500 on pace for another year of 20% or more returns. As of now, the benchmark index has achieved a total return, including dividends, of almost 25%. This follows a substantial total return of over 26% in 2023.
This is the fourth time in the past six years that the index has recorded a gain of 20% or more. Conversely, it has only witnessed two years of negative returns since the 2008 financial crisis. These negative years were in 2022, where it registered a negative total return of 18%, and in 2018, with a close-to-zero total return of around -4%. However, the period from 2014 to 2021 has seen seven years with returns of 20% or more.
Despite some investors being hesitant about investing more in stocks following two consecutive years of high returns, the market is still in its early stage of its latest bull run. Since 1950, the typical duration of a bull market in the S&P 500 is around 5.5 years, as per Carson Investment Research.
Now, let's discuss a Vanguard exchange-traded fund (ETF) that might top the index fund performers in 2025.
Tech sector sets the pace again
There are several excellent index funds from Vanguard to opt for, but my prediction for 2025 leans towards the Vanguard Growth ETF (VUG -1.26%). This ETF tracks the CRSP US Large Cap Growth Index, which essentially represents the growth stock segment of the S&P 500.
The ETF's portfolio is fairly concentrated, with its top three holdings of Apple, Nvidia, and Microsoft accounting for nearly a third of its value. When you add the next four largest holdings – Amazon, Alphabet, Meta Platforms, and Tesla – the total value of the top seven companies represents approximately 52.5% of the portfolio. This top-heavy weighting introduces some risk but also positions the ETF to outperform substantially when the tech sector is in good health.
The Vanguard Growth ETF boasts an impressive track record, with an average annualized return of 15.6% over the past decade, up until November's end. This surpasses the 13.4% average annual return of the S&P 500 over the same period. In 2024, it managed a better-than-average return of 32.1% as of November's end.
Its performance is heavily influenced by its top seven holdings, and this is one of the main reasons why it has been my top Vanguard ETF pick for 2025. All seven of its top holdings are strong plays in the artificial intelligence (AI) megatrend, which shows no signs of slowing down.
These companies are leaders in various aspects of AI, such as AI chips, cloud computing, software, robotics, and autonomous driving. As long as spending on AI continues to grow, and companies look to advance their AI models, I believe these stocks will remain strong performers.
I prefer the Vanguard Growth ETF to the Vanguard Information Technology ETF (VGT -1.25%), as the latter has an even higher concentration in its top three stocks and lacks Amazon, Alphabet, Meta Platforms, and Tesla. I believe all four of those stocks have the potential for strong performances in 2025.
While there may be a general marketwide shift towards small-cap stocks or value stocks in 2025, I anticipate that large-cap growth stocks will maintain their momentum. These companies have demonstrated strong growth, coupled with high cash reserves and substantial cash flow. This should enable them to continue investing in AI and other innovation areas, which I foresee continuing to drive the market forward.
Alongside the Federal Reserve's continued push to reduce interest rates and a potentially less stringent regulatory environment, I am expecting another strong year for the stock market, with large-cap growth stocks once again leading the charge.
Given the expected continued growth of the tech sector and positive market conditions, now might be an excellent time for individuals interested in finance and investing to consider allocating some of their money into ETFs like the Vanguard Growth ETF (VUG). This ETF, with its focus on large-cap growth stocks, has shown exceptional performance in recent years, outperforming the S&P 500.
As investors review their financial strategies for the coming years, particularly 2025, they should also consider the potential risks associated with such an investment, such as the ETF's top-heavy weighting and reliance on the tech sector's performance.
