I love investing in individual stocks and truly believe that a well-designed stock portfolio can outperform the stock market as a whole. At the same time, it’s worth putting some of your investment money on autopilot in a top-quality index fund.
Not only do index fund ETFs provide diversified exposure to an entire portfolio of stocks in a single investment vehicle, they can also generate some pretty impressive returns over the long term. With that in mind, some of my favorite stocks (particularly high dividend stocks) look like great value right now, but I’d like to gradually buy stocks of three ETFs in particular throughout 2025. It’s planned.
ETFs every investor should own
If I could only own one investment it would be the Vanguard S&P 500 ETF (VOO 0.20%). This is Vanguard’s flagship S&P 500 index fund. As the name suggests, this ETF tracks the S&P 500. (^GSPC 0.25%)which is widely considered to be the best benchmark for U.S. stock market performance.
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This ETF has one of the lowest expense ratios at 0.03%. This means that if you invest $10,000 in the fund, only $3 will go toward annual investment expenses. Over the long term, the S&P 500 has produced an average total return of approximately 10% annually. This means a $10,000 investment in an ETF could be worth about $175,000 over 30 years with no maintenance required along the way.
My top ETFs for 2025
At the beginning of 2024, small-cap stocks were trading at their lowest price-to-book value relative to large-cap stocks since the late 1990s. And over the course of the year, the valuation gap widened further as large-cap tech stocks outperformed and interest rates didn’t fall as much as experts expected.
Currently, the average component of the Russell 2000 Small Cap Index has a price-to-book ratio of 1.9x, while the price-to-book ratio for the typical S&P 500 stock is 4.7x. With interest rates finally starting to fall and a potentially pro-growth environment created by the incoming Trump administration, small-cap stocks could have a big tailwind. That’s why Vanguard Russell 2000 ETF (VTWO 0.38%) This is the top comprehensive ETF that I will choose in 2025.
Exposure to AI without company-specific risks
Let me be clear: I think artificial intelligence (AI) is a huge opportunity and could ultimately become the most important technology trend of my lifetime. However, I specialize in valuing bank stocks, real estate companies, and e-commerce businesses, to name a few. Frankly, the best opportunities for AI are not in my wheelhouse. Every good investor should know the scope of their capabilities, but AI stocks are outside of my scope.
As such, we plan to begin building a position in the Ark Autonomous Technology and Robotics ETF. (ARKQ 2.94%)managed by Cathie Wood’s Ark Investments. This fund owns a carefully selected portfolio of stocks that could be the big winners of the AI revolution. The fund owns big-name companies like Tesla and Nvidia, as well as lesser-known companies like Kratos Defense & Security and less-prominent AI businesses like Deere.
Indeed, this is by far the highest cost ETF on this list, with an expense ratio of 0.75%. However, this is consistent with other professionally actively managed funds.
How should I use these ETFs in my portfolio?
To be clear, the majority of my portfolio is still made up of individual stocks, and I don’t expect that to change anytime soon. However, at this point in my investing career (mid-40s), I am starting to shift my focus a bit to building a solid “backbone” of my portfolio with some top quality index funds. Looking ahead to 2025, and for the foreseeable future, I plan to allocate half of the new money in my brokerage account to stocks and the other half to ETFs like these three.
Matt Frankel has positions in the Vanguard Russell 2000 ETF and the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Deere & Company, Nvidia, Tesla, and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
