2023’s S&P 500 and 2025 Investments: ETFs to Watch

The S&P 500 index is poised to finish a remarkable year. As of December 27, the broad market index has risen 25% year to date. Wall Street is optimistic, predicting that this bull run will carry into 2025, with consensus estimates suggesting a target of 6,679, reflecting a further 12% increase.

Making Smart Investment Choices

Investing in the S&P 500 through an exchange-traded fund (ETF) is often a wise decision. Historically, it’s provided an annual average return of 9% when dividends are reinvested. However, certain funds have the potential to outperform the S&P 500.

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Read on to discover two ETFs that seem likely to outperform in 2025.

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1. VanEck Semiconductor ETF

The VanEck Semiconductor ETF (NASDAQ: SMH) has been one of the top ETF performers over the last decade, soaring about 800% during this period.

Semiconductor stocks have thrived as technology’s share of the economy has grown, driven by advancements in mobile technology, cloud computing, cryptocurrency, and artificial intelligence (AI).

Year to date, the VanEck Semiconductor ETF has gained 42%, though it has retreated from its summer peak. While some might see the chip sector as inflated due to AI, ample opportunities for growth still exist.

Major holdings demonstrated substantial growth recently. For instance, Nvidia reported a 94% revenue increase in the third quarter, while Taiwan Semiconductor Manufacturing achieved a 39% revenue growth and trades at a price-to-earnings ratio of 33, which aligns closely with the broader market.

Despite concerns regarding AI’s pace of growth, emerging technologies are just beginning to make an impact. Funding from the CHIPS Act, for example, is expected to benefit firms like TSMC, ASML, Intel, and Micron, all of which are top holdings in the ETF. Moreover, cloud software companies are poised to gain substantially from AI, driving further demand for chips.

The VanEck Semiconductor ETF is an attractive option for those seeking exposure to AI. It is likely to continue its positive trajectory as 2025 approaches.

2. Financial Select Sector SPDR Fund

The financial sector is also enjoying success, particularly since the recent election. The Financial Select SPDR Fund (NYSEMKT: XLF) has risen 30% this year. Heading into 2025, favorable conditions appear strong for this ETF, which boasts major holdings like Berkshire Hathaway, JPMorgan Chase, and Visa.

Current expectations for interest rates suggest they will remain elevated through 2025, with the Federal Reserve projecting just two rate cuts next year, leading to a forecasted range of 3.75%-4% for the Fed funds rate.

The economy also demonstrates resilience, marked by low unemployment, solid GDP growth, and controlled inflation. Investors are optimistic about the anticipated influence of the incoming administration on the financial sector, expecting lower taxes and more favorable regulations that could stimulate more mergers and acquisitions, benefiting investment banking.

Favorable interest rates combined with a robust economy create an ideal environment for banks and financial stocks. This situation enhances their ability to generate net interest income and boosts loan demand.

Given the cyclical nature of financial stocks and the waning concerns about a recession, this sector may be well-positioned for a strong showing in 2025. Additionally, the ETF currently trades at a price-to-earnings ratio of just 17, representing a significant discount compared to the S&P 500. Given the potential for its key holdings to generate impressive earnings growth in 2025, this ETF appears to be a sound investment choice.

Investing $1,000 Wisely

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*Stock Advisor returns as of December 23, 2024

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.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.