I’m a big fan of investing in individual stocks and truly believe that a well-crafted 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 a single investment vehicle, but can also generate some pretty impressive returns over long periods of time. With that in mind, although some of my favorite stocks (especially high-yield dividend stocks) look like excellent values right now, I’m planning to gradually buy shares of three ETFs in particular throughout 2025.
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If I was only allowed to 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&P 500 (SNPINDEX: ^GSPC), which is widely considered to be the best benchmark of how the U.S. stock market is performing.
This ETF has a rock-bottom 0.03% expense ratio, which means that if you have $10,000 invested in the fund, only $3 will go toward annual investment expenses. Over long periods of time, the S&P 500 has produced average total returns of about 10% annualized. For context, this means that a $10,000 investment in the ETF could be worth about $175,000 in 30 years, with no maintenance needed along the way.
At the beginning of 2024, small-cap stocks were trading at their lowest price-to-book values relative to large caps since the late 1990s. And throughout the year, the valuation gap has widened even further, thanks to the outperformance of large-cap tech stocks and interest rates not falling as much as experts predicted.
Now, the average component of the Russell 2000 small-cap index trades for a price-to-book multiple of 1.9, compared with 4.7 for the typical S&P 500 stock. With interest rates finally starting to fall and a potentially pro-growth environment with the incoming Trump administration, small caps could have some big tailwinds. That’s why the Vanguard Russell 2000 ETF (NASDAQ: VTWO) is my top overall ETF pick for 2025.
To be perfectly clear, I think artificial intelligence (AI) is a massive opportunity and could end up being the most important technological trend in my lifetime. However, I’m good at evaluating bank stocks, real estate companies, and e-commerce businesses, to name a few. The best AI opportunities are, quite frankly, not in my wheelhouse. Every good investor should know their circle of competence, and AI stocks are a bit outside of mine.
