The S&P 500 index is set to cap off a banner year. Through Dec. 27, the broad market index is up 25% year to date, and Wall Street is calling for the bull run to continue into 2025 with the consensus estimates of 6,679, or up 12% as of Dec. 27.
Investing in the S&P 500 through an exchange-traded fund (ETF) is generally a smart move as the index has historically returned an annual average of 9% per year with dividends reinvested, but other funds may beat the S&P 500.
Keep reading to learn about two ETFs that look poised to outperform in 2025.
Image source: Getty Images.
1. VanEck Semiconductor ETF
One of the best-performing ETFs of the last 10 years has been the VanEck Semiconductor ETF (SMH -1.01%), up roughly 800% over that time span.
Semiconductor stocks have soared over that period as technology has come to comprise an increasing percentage of the economy through new industries like mobile technology, cloud computing, cryptocurrency, and now artificial intelligence.
The VanEck Semiconductor ETF has jumped 42% year to date, though it’s down from its peak this summer. You might think the semiconductor sector has become overheated from the AI boom, but there’s still more room for it to rally.
In fact, many of the biggest holdings are closing out 2024 with roaring growth like Nvidia, whose revenue jumped 94% in the third quarter, and Taiwan Semiconductor Manufacturing, which posted revenue growth of 39% and now trades at a price-to-earnings ratio of 33, which is not much more expensive than the broad market.
While there are some concerns about a slowdown in AI, there are also signs the new technology is just starting to take off. Billions of dollars are pouring in for new foundries from the CHIPS Act, which should favor companies like TSMC, ASML, Intel, and Micron, which are all top-10 holdings of the ETF. Plus, cloud software companies are also starting to see meaningful gains from artificial intelligence, which favors increased spending on chips.
If you’re looking for an easy way to get exposure to AI, the VanEck Semiconductor ETF is a no-brainer investment to own. Heading into 2025, the ETF is likely to keep up its winning ways.
2. Financial Select Sector SPDR Fund
Financial stocks have also had a winning year and have been soaring since the election. The Financial Select SPDR Fund (XLF -0.73%) is up 30% year to date, and 2025 is shaping up to be a near-perfect combination of tailwinds for the ETF, whose top holdings include Berkshire Hathaway, JPMorgan Chase, and Visa.
Interest rates are now expected to remain elevated through 2025 as the Federal Reserve recently forecast just two rate cuts next year, which would bring the Fed funds rate down from 4.25%-4.5% to 3.75%-4%, meaning short-term interest rates are likely to remain above 4%.
What’s more, the underlying economy remains strong with low unemployment, solid GDP growth, and inflation now under control. Investors also seem to be bullish on incoming Trump administration’s impact on the sector as they expect lower taxes and less regulation, which is likely to encourage more mergers and acquisitions, a boon for the investment banking sector.
High interest rates and a strong economy are an ideal scenario for banks and other financial stocks as that allows them to earn more net interest income, and also helps drive consumer spending and demand for loans.
Financial stocks tend to be highly cyclical, and with fears of a recession finally receding, these stocks look to be in store for a strong 2025.
Finally, the sector is cheap as the ETF trades at a P/E of just 17, a significant discount to that of the S&P 500. Considering that many of its top holdings are likely to generate solid earnings growth in 2025, the ETF looks like a solid bet to deliver strong performance.
JPMorgan Chase is an advertising partner of Motley Fool Money. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Berkshire Hathaway, Intel, JPMorgan Chase, Nvidia, Taiwan Semiconductor Manufacturing, and Visa. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
