I'm Planning to Purchase These 3 ETFs in January 2025
2025 is here, and with 2024 ending on a wobbly note and interest rates higher than anticipated, there's potential for some interesting opportunities. Investors don't have to dive into individual stocks to capitalize on this, as there are fantastic ETFs that could prove to be lucrative long-term investments. Here are three I'm including in my portfolio this January:
The valuation gap between small and large caps widens even further
At the start of 2024, small-cap stocks registered their lowest price-to-book (P/B) valuation compared to large caps in 25 years. Thanks to a stellar year for the S&P 500, particularly the megacap tech sector, this gap has only widened. In fact, the average S&P 500 component is trading for a P/B multiple of 5, whereas the average small cap stock on the Russell 2000 (INDEXRUSSELL:RUT) is sporting a P/B ratio of just 2.1.
Small caps could potentially close this gap in 2025 and beyond for several reasons. For instance, lower interest rates tend to benefit small caps more disproportionately, as they are typically more reliant on debt. Additionally, with the incoming Trump administration favoring deregulation, it might be easier for small caps to grow. I'm betting on the Vanguard Russell 2000 ETF (VTWO -0.04%) to leverage this opportunity.
Real estate could reward investors in a big way
I recently penned an article predicting bold stock market trends in 2025, and one prediction is that real estate will be the standout S&P sector. And the main reason is that I expect the Fed's rate cuts to progress a little faster than the consensus suggests.
Lower interest rates are beneficial for real estate investment trusts (REITs) in several ways. First, with reduced borrowing costs, REITs experience a better growth environment. Second, digest a quick economics lesson: yield-focused financial instruments like REITs tend to offer higher yields when interest rates rise and lower yields when rates fall. Since price and yield are inversely related, falling rates result in higher REIT prices. I already own the Vanguard Real Estate ETF (VNQ -0.46%), and I plan to enhance my investment in 2025.
Dividend stocks might be undervalued
If you think that all stocks are overpriced at the moment, you might be underestimating dividend stocks. The Vanguard High Dividend Yield ETF (VYM -0.13%) has underperformed the S&P 500 by nearly 10 percentage points over the past year. However, with interest rates still running high, dividend stocks could be an excellent opportunity.
This ETF boasts an incredibly low 0.06% expense ratio and follows a market-cap-weighted index composed of large-cap stocks with higher-than-average dividend yields. Top names include Broadcom (AVGO -1.17%), JPMorgan Chase (JPM 0.10%), and ExxonMobil (XOM 0.10%). No single stock holds more than 4% of the fund's assets.
A common thread
It's quite noticeable that my picks in all three ETFs share a common theme: I anticipate interest rates to decrease more rapidly than many experts anticipate in 2025. While I believe this will be a favorable catalyst, the reasons I'm investing in these ETFs extend beyond my 2025 prognostication.
In essence, I'm purchasing these Vanguard ETFs as long-term investments, confident they will deliver positive results regardless of what transpires in 2025. Since its 2010 inception, VTWO has generated 10.3% annualized total returns. Despite a challenging environment over the last five years, VNQ has delivered 7.5% long-term returns. Additionally, VYM has palm-sized returns of 9.8% over the past decade. I'm keeping these investments for the long haul, but I'm eager to make these additions now.
- Given the potential for decreasing interest rates in 2025, I'm considering investing in the Vanguard Real Estate ETF (VNQ -0.46%) to capitalize on its growth in a lower interest rate environment.
- Despite the current high interest rates, I believe dividend stocks, such as those in the Vanguard High Dividend Yield ETF (VYM -0.13%), could offer attractive returns due to their higher-than-average dividend yields.
- Considering the widening gap between small-cap and large-cap valuations, I'm inclined to invest in the Vanguard Russell 2000 ETF (VTWO -0.04%) to potentially benefit from a potential closing of this gap in 2025 and beyond.
- Regardless of my 2025 interest rate predictions, I'm confident that these long-term investments in Vanguard ETFs, like VTWO, VNQ, and VYM, will deliver positive results due to their strong historical performance.
