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Megacap stocks dominated in 2024, creating nice returns for anyone invested in the Nasdaq-100 and S&P 500. Unfortunately, no financial market trend lasts forever. Many pundits believe the megacap growth could pause in 2025, leaving room for other stock market segments to take the lead.
If you agree with that prediction, you may need to reset your exchange-traded fund portfolio for the year ahead. Let’s explore three critical ETF selection criteria and meet six ETFs that may be winners in 2025.
Key Factors To Consider When Comparing ETFs
You have many ETF options available, and choosing the right one can be overwhelming. To keep your search efficient, focus on low-expense funds that deliver the appropriate risk and market exposure.
Low Expenses
ETFs have administrative expenses that they pass on to shareholders. The funds disclose these expenses as an expense ratio. The ratio is a percentage representing shareholders’ annual expense burden.
In 2016, Morningstar published a white paper stating that the “expense ratio is the most proven predictor of future fund returns.” The paper included the recommendation that investors evaluate expense ratios early in their selection process. That recommendation still stands today.
Only one of the ETFs introduced below has an expense ratio above 0.04%. A 0.04% expense ratio equates to $4 in expenses annually for every $10,000 invested.
Risk Tolerance
Managing risk according to what you can handle is a primary investing responsibility. Too much or too little risk undermines your commitment to the strategy. Whether your portfolio is too volatile or too conservative, the common reaction is the same: You’ll want to change things. Emotional decision-making can result and returns can suffer.
So, think about the risk level you want, with the understanding that risk and reward go together. High risk means greater earnings potential but with volatility. Low risk means less volatility and lower gain potential.
Market Exposure
Market exposure refers to the types of assets the fund holds. For example, a fund that replicates the S&P 500, which includes 500 of the largest public companies, has large-cap exposure. A fund that holds Nasdaq-100 stocks has large-cap technology exposure.
Your targeted exposure should align with your risk tolerance. Some broad guidelines to remember are:
- Niche exposure can be riskier than broad exposure.
- Stocks are often riskier than investment-grade bonds.
- International stocks are generally riskier than domestic stocks.
- Growth stocks with high valuations are riskier than value stocks.
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6 Best ETFs To Buy And Invest In 2025
The table includes six low-cost ETFs that are poised to capitalize on financial market trends in 2025.
Data source: Fund websites.
Let’s explore each of these funds in more detail below.
1. Schwab US Small Cap ETF (SCHA)
- Share price: $27.14
- Expense ratio: 0.04%
- Number of holdings: 1,738
- Inception date: 11-03-2009
- 10-year average annualized returns: 9.1%
- 30-day SEC yield: 1.3%
Schwab U.S. Small Cap ETF Overview
Schwab’s small-cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index. The fund provides easy, diversified access to the small-cap segment of the U.S. stock market.
Why SCHA Is A Top Choice
In 2025, smaller companies stand to benefit from falling interest rates and, possibly, deregulation and lower corporate tax rates courtesy of a new presidential administration. These conditions encourage growth and expansion, which are primary goals for small companies.
Larger companies may not see the same boost. Big corporations often have higher concentrations of fixed-rate debt, which doesn’t reprice to lower market rates until refinanced. As well, large-caps with international revenue sources will see a lesser impact from tax cuts.
As well, large-caps are plagued by high valuations right now, which contributes to volatility. The current price-to-earnings (PE) ratio of the S&P 500 is 31. The SCHA portfolio compares favorably on this metric, with a PE ratio of 18.
2. SPDR Portfolio S&P 400 Mid Cap ETF (SPMD)
- Share price: $57.56
- Expense ratio: 0.03%
- Number of holdings: 401
- Inception date: 11-08-2005
- 10-year average annualized returns: 10.1%
- 30-day SEC yield: 1.3%
SPDR Portfolio S&P 400 Mid Cap ETF Overview
SSGA’s mid-cap fund tracks the S&P 400 Mid Cap Index. Holdings include Williams Sonoma (WSM), DocuSign (DOCU) and Burlington Stores (BURL).
Why SPMD Is A Top Choice
Mid-sized companies should see the same tailwinds as small caps in 2025—but with the potential for better results. Mid-caps are more established, mature and profitable than small caps. They also have better access to capital, which makes them more resilient.
Resilience could play a role if the economic and policy tailwinds don’t materialize as expected. If the Fed takes its time lowering interest rates, for example, mid-caps could outperform small-caps and large-caps next year. SPMD’s PE ratio is 18.7, slightly higher than the Schwab small-cap fund.
3. iShares Core S&P Total U.S. Stock Market ETF (ITOT)
- Share price: $133.13
- Expense ratio: 0.03%
- Number of holdings: 2,548
- Inception date: 01-20-2004
- 10-year average annualized returns: 12.8%
- 30-day SEC yield: 1.2%
iShares Core S&P Total U.S. Stock Market ETF Overview
iShares Core S&P Total U.S. Stock Market ETF tracks the S&P Total Market Index. The index intends to represent all segments of the stock market, from microcaps to megacaps.
Why ITOT Is A Top Choice
If you don’t want to bet on one market segment, this fund covers all bases. The portfolio includes companies of all sizes and from all economic sectors. For better or worse, ITOT will deliver market-level returns, minus a few basis points for fund expenses.
Note that the ITOT portfolio is weighted by market capitalization, so the biggest companies are held in the largest proportions. Concentration risk is a concern—the “Magnificent 7” megacap stocks will have undue influence over the entire group’s performance.
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4. Vanguard Value ETF (VTV)
- Share price: $175.06
- Expense ratio: 0.04%
- Number of holdings: 335
- Inception date: 01-26-2004
- 10-year average annualized returns: 10.8%
- 30-day SEC yield: 2.0%
Vanguard Value ETF Overview
Vanguard’s value fund tracks the CSRP U.S. Large Cap Value Index. The index and the fund are sector-diversified with larger holdings in financials, industrials and healthcare.
Why VTV Is A Top Choice
As we close out 2024, growth stock valuations are running high. This trend could continue, stretching stock prices even higher relative to earnings. Or, it could reverse in a pullback. Either way, the conditions look good for value stocks to shine as a counterpoint. Investors may add value stock exposure to offset the rising risk of high valuations in growth, or in response to a reset.
VTV is an easy option to secure that exposure. The fund holds premier value stock names, including Berkshire Hathaway (BRK.B) and Procter & Gamble (PG), plus the AI stock Broadcom (AVGO).
5. Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
- Share price: $49.25
- Expense ratio: 0.30%
- Number of holdings: 52
- Inception date: 10-18-2012
- 10-year average annualized returns: 9.3%
- 30-day SEC yield: 4.3%
Invesco S&P 500 High Dividend Low Volatility ETF Overview
Invesco’s high dividend low volatility fund tracks an index that includes 50 dividend-paying S&P 500 stocks. The holdings are primarily large-caps with value characteristics.
SPHD is popular among income investors. To learn more, see how to build an ETF portfolio for income and best ETFs for income investing.
Why SPHD Is A Top Choice
While investors are cautiously optimistic about the U.S. economy and the Republican agenda, there is an undercurrent of uncertainty. Certain policy changes, such as new tariffs, could invite inflation. Lingering inflation, in turn, would slow the pace of the Fed’s interest rate cuts.
When investor uncertainty is combined with high valuations and over-concentration in the S&P 500, volatility can result. The high income and low volatility characteristics of SPHD’s portfolio could provide some shelter if the market turns into a rollercoaster in 2025.
6. Vanguard Long-Term Treasury ETF (VGLT)
- Share price: $56.92
- Expense ratio: 0.04%
- Number of holdings: 88
- Inception date: 11-19-2009
- 10-year average annualized returns: 0.16%
- 30-day SEC yield: 4.6%
Vanguard Long-Term Treasury ETF Overview
Vanguard’s VGLT fund holds Treasury bonds with maturities ranging from 10 to 25 years. As of December 2024, the average coupon rate is 3.2% and the yield to maturity is 4.5%.
Why VGLT Is A Top Choice
Long-term bonds are reactive to market interest rate changes because they don’t reprice as quickly as short-term bonds. The pricing response goes in the opposite direction of interest rates. Given the prevailing opinion that rates will decline in 2025, today’s long-term bonds may carry above-market rates sometime next year. That will drive their value on the secondary market higher.
VGLT provides that long-term bond exposure. The fund is a suitable diversification option within or outside a Vanguard retirement investing portfolio.
Bottom Line
As an ETF investor, there are times when you want protection from certain elements of the market. Factors to watch currently include high valuations and the excessive influence of megacaps. Diversifying your ETF portfolio with small cap, midcap and value stock exposure may provide the protection you need in the year ahead.
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