Investing in the stock market right now may be both exciting and nerve-racking given how well it has been performing. You may want to buy into the rally, but at the same time, you may also be nervous that it may be getting overheated and due for a possible correction next year.
While some stocks are indeed trading at excessive valuations and may be risky buys right now, there are pockets of the market where many types of stocks can still surge higher in value, and provide you with a lot of safety.
Vanguard exchange-traded funds (ETFs) can offer a good mix of low fees and excellent diversification. And they invest in blue chip stocks in different areas of the market. Two Vanguard funds that may be optimal investments to put into your portfolio heading into 2025 are the Vanguard Utilities Index Fund ETF (VPU -0.27%) and the Vanguard High Dividend Yield Index Fund ETF (VYM -0.55%). While these funds have underperformed the S&P 500 in recent years, here's why they could be good buys right now.
VPU total return level, data by YCharts.
Vanguard Utilities Index
Investing in utility stocks can be a good area of the stock market to focus on in 2025 because they generally have stable businesses, pay dividends, and their expenses can come down as interest rates are falling. And amid the growth and expansion of artificial intelligence, there are also greater needs for energy, making these stocks attractive investments to hold on to for the long term.
The Vanguard Utilities Index provides exposure to many top utility stocks, including NextEra Energy and Southern Company, which together account for just under 20% of the fund's total holdings. There are 66 stocks in the fund, providing investors with some good diversification while still having decent positions in these stocks.
With too much diversification, you'll often find stocks accounting for minuscule percentages of the portfolio, and so even if they are great investments and generate impressive returns, they may not have much of an impact on the overall ETF. That's not the case with this Vanguard fund -- it isn't heavily diversified, which can be good for growth investors.
Another great feature of the ETF is that it has a low expense ratio of 0.10% and yields 2.8%, which is more than double the S&P 500 average of 1.2%. If you are expecting a slowdown in the stock market, the dividend income that the Vanguard Utilities ETF generates can help to offset declines in value.
In 2022, for example, when the S&P 500 fell by more than 18%, this ETF generated total returns (including dividends) of 1%. It did a great job of preserving value for investors at a time when the market was in a free fall.
The Vanguard Utilities Index is not only a great fund to invest in for next year, but also to hold on to for the long term.
Vanguard High Dividend Yield Index
Dividend income can be incredibly valuable if you're worried about a downturn. And even if you are optimistic about the stock market, that recurring income can still be a good way to boost your overall returns.
As long as you are investing in safe dividend stocks and are OK with the potential that these types of investments may not generate the same type of returns you might expect with growth stocks, particularly in a bull market, then they can make for excellent investment options to hang on to.
The Vanguard High Dividend Yield Index pays 2.7% and charges an expense ratio of just 0.06%. This is a much more diverse fund than the Vanguard fund focused on just utilities; it holds 536 stocks. It can be an ideal option for risk-averse investors who may be feeling a bit more apprehensive about the market right now.
The top three holdings in the ETF are Broadcom, JPMorgan Chase, and ExxonMobil, and together, they make up just 11% of its total weight. The fund invests broadly in the stock market with financial stocks leading the way, accounting for 22% of its total weight, followed by 13% for industrials, 12% for healthcare, and other sectors adding to its overall diversification.
In 2022 amid the turmoil in the markets, this ETF was down just 0.5% after factoring in its dividend income. It can be an appropriate option for investors who want to keep their risk low heading into the new year.
