As 2025 fast approaches, many investors are trying to find new places to invest or looking to reallocate money to other areas. Exchange-traded funds (ETFs) are one great place to invest, especially if you don't have time to continually research and track a lot of individual stocks.
What will be the best ETF to invest in for 2025? Let's look at some top contenders.
Small-cap ETFs
There has been a growing call among some analysts that small-cap stocks will outperform large-cap stocks in 2025. If that happens, it will be the first time in eight years.
Among the analysts pounding the table for small caps is Jefferies analyst Steven DeSanctis, who likes both small-cap valuations as well as their strong balance sheets. He also thinks the new Trump administration should be favorable to smaller companies and that mergers and acquisitions are likely to pick up next year.
Meanwhile, small caps historically have outperformed growth stocks during periods of declining rates. The Fed already began cutting rates this year, and that is expected to continue next year.
If small-caps do outperform in 2025, the Vanguard Russell 2000 ETF (VTWO -1.48%) or one of its growth and value versions -- the Vanguard Russell 2000 Growth ETF (VTWG -1.72%) or the Vanguard Russell 2000 Value ETF (VTWV -1.34%) -- are great options to be among the best-performing index ETFs in 2025.
Image source: Getty Images.
Value ETFs
Growth stocks dominated the market in 2024, as the so-called "Magnificent Seven" helped lead the market higher this year. Meanwhile, growth stocks have greatly outperformed value stocks for much of the past decade.
However, that hasn't always been the case, and value stocks have certainly had periods were they have outperformed growth stocks. This includes in the 1980s as well as the 2000s after the the internet bubble burst.
There are also a lot more cyclical stocks that get tossed in the value category, so a more favorable economic and regulatory environment could certainly be a boost to them. Many also carry debt, so lower rates would be good for them.
If value stocks can outperform in 2025, the Vanguard 500 Value Index (VOOV -0.63%) and the Vanguard Russell 1000 Value ETF (VONV -0.62%) are two great options to consider. The latter will have some mid-cap stocks in there as well, although both are classified as large-cap value.
Growth ETFs
Large-cap growth shares have helped power the stock market the past two years, and at this point there are no indications that this momentum is about to slow down. Eight of the S&P 500's top 10 stocks are classified as growth stocks, and Broadcom, which is classified as a value stock, probably should be reclassified to growth given the opportunities in artificial intelligence (AI) the company sees moving forward.
Growth-oriented ETFs have outperformed both this year and over the last decade. For example, the Vanguard S&P 500 Growth ETF (VOOG -1.43%), which essentially tracks the growth side of the S&P 500, is up 39% year to date and has generated an average annual return of nearly 15% over the past decade, as of the end of November. The Invesco QQQ ETF (QQQ -1.33%), meanwhile, which tracks the Nasdaq-100, is up 29.5% year to date and has generated a nearly 18% annual return over the past 10 years, as of the end of November.
My prediction
I believe that large-cap growth stocks will once again outperform in 2025. AI is still in its early innings, and megacap technology companies are still the ones best-positioned to continue to capture this opportunity. Meanwhile, many of these stocks are reasonably valued give the growth opportunities still in front of them. And it can be argued that some megacap growth stocks, such Nvidia and Alphabet, are downright cheap at current levels. Nvidia only trades at a forward price-to-earnings ratio of 30 times 2025 analyst estimates, despite expected growth of 50%, while Alphabet trades at around 21 times, which is under the S&P 500's average of 24 times.
As long as AI-fueled growth continues, I think this area of the market will keep outperforming next year. And given that AI models need exponentially more computing power to advance and that cash-rich top tech companies are willing to pour money into these opportunities, I don't see AI's momentum stopping anytime soon.
As for the index ETF that I think will perform the best in 2025, my prediction is that it will be the Invesco QQQ ETF. Its holdings are a little less concentrated at the top than the Vanguard S&P 500 Growth ETF, which is dominated by Apple, Nvidia, and Microsoft, and I think some of the other big tech stocks, such as Alphabet, Meta, Amazon, and Broadcom (which is not in the S&P 500 Growth ETF), have room to shine next year.
