We're only seven days away from the inauguration of Donald Trump as the 47th U.S. President. Investors have been speculating about which stocks might perform the best in a second Trump administration since the November election (and even before then).
Identifying exchange-traded funds (ETFs) that could be big winners should arguably be easier than picking individual stocks. And narrowing the list to only funds offered by a top investment manager such as Vanguard should be even easier, right? Which Vanguard ETF is most likely to soar during Trump's first year back in office?
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Multiple contenders
Answering this question isn't as easy as it might seem. I think there are multiple Vanguard ETFs that could be strong contenders.
The Vanguard S&P 500 Growth ETF (VOOG 0.16%) was the best-performing ETF in the Vanguard family in 2024. With all of the so-called "Magnificent Seven" stocks ranking as the fund's largest holdings, it wouldn't be surprising if this ETF excelled again this year. The biggest knock against the Vanguard S&P 500 Growth ETF, though, is that it's already expensive with an average price-to-earnings (P/E) ratio of 36.5.
I also think several of Vanguard's ETFs that primarily own small-cap stocks could be big winners in 2025. The flagship fund in this group, the Vanguard Small-Cap ETF (VB 0.05%), looks attractive. Although large-cap stocks have trounced small-cap stocks in recent years, small-cap stocks have historically delivered greater returns than large-cap stocks over the long run.
Some of President-elect Trump's proposed policies could also provide catalysts for the Vanguard Small-Cap ETF (and other Vanguard ETFs focusing on small-cap stocks). For example, Trump wants to reduce federal regulations, which can be especially burdensome for small companies.
It's possible, though, that the Federal Reserve's reluctance to cut interest rates further could prevent the Vanguard Small-Cap ETF and its siblings from taking off. If Trump imposes steep across-the-board tariffs and deports millions of illegal immigrants as he's promised to do, inflation could increase. This scenario would almost certainly bring the Fed's rate cuts to a screeching halt. That could hurt small-cap stocks (and ETFs), which typically rise as interest rates decline.
Speaking of Trump's proposals, he's been quite vocal about his goal to enable oil companies to "drill, baby, drill." Could this put wind in the sails of the Vanguard Energy ETF (VDE)? Maybe. This ETF's portfolio is loaded with major oil producers including ExxonMobil, Chevron, and ConocoPhillips, which together make up nearly 42% of its portfolio.
However, my main hesitation with picking the Vanguard Energy ETF is that increased domestic oil and gas production could cause prices to fall. When oil prices slide, oil stocks usually do too.
Most likely to soar
So which Vanguard ETF is most likely to soar in Trump's first year back in the White House? I think the Vanguard Financials ETF (VFH 0.16%) arguably ranks as the top candidate.
As its name indicates, this Vanguard ETF owns stocks of companies that provide financial services. Its portfolio currently includes 409 stocks with a median market cap of $144.5 billion. JPMorgan Chase, Berkshire Hathaway, and Mastercard are its top three holdings.
The Vanguard Financials ETF was one of the best-performing funds in the Vanguard family in 2024, racking up a gain of almost 28%. Its total return was even higher thanks to a dividend yield that stands at 1.54% right now.
Valuation isn't a concern with this ETF. The average P/E ratio of the stocks it owns is 18.4, roughly 50% below the sky-high earnings multiple of the Vanguard S&P 500 Growth ETF.
I think two of Trump's proposed policies should especially boost the Vanguard Financials ETF this year. First, deregulation could be a breath of fresh air for many financial services companies and help them generate higher profits. Second, Trump's proposed corporate tax cuts should also increase the earnings of these companies and therefore provide a catalyst for the Vanguard Financials ETF.
Not a slam dunk
Now for an important disclaimer: I could be flat-out wrong. It's not a slam dunk by any stretch of the imagination that the Vanguard Financials ETF will be the best-performing fund in the Vanguard lineup this year.
For one thing, Trump's team might be slow to implement the promised regulatory streamlining. Passing corporate tax cuts with a slim GOP majority in the House of Representatives could be an uphill battle, too. If Trump successfully puts steep tariffs into place, it could hurt financial stocks more than I'm anticipating. There are also plenty of other wild cards that could hamper the performance of the Vanguard Financials ETF.
Still, I'm more bullish about this Vanguard ETF than any other for 2025 based on the current environment. Even if it isn't the top Vanguard fund in Trump's first year back in office, I think it's likely to be among the leaders.
