Three ETFs to Buy in 2025 Despite Tempting Individual Stocks

Investing in individual stocks can be highly rewarding, and a well-structured stock portfolio often outperforms the overall market. However, there's also significant benefit in setting aside some investment funds for top-quality index funds.

Index fund ETFs offer a unique chance to gain diversified exposure across numerous stocks through a single investment. They can provide solid returns over the long haul. While I have attractive individual stocks, particularly those with high dividends, I intend to regularly invest in three specific ETFs during 2025.

The Essential ETF for Every Investor

If I had to choose just one investment, it would undoubtedly be the Vanguard S&P 500 ETF (VOO). This prominent index fund tracks the S&P 500, which is widely viewed as the primary benchmark for the U.S. stock market.

With an incredibly low expense ratio of just 0.03%, if you invest $10,000 in this ETF, your annual expenses would only be $3. The S&P 500 has historically yielded average total returns around 10% annually. This translates to a potential growth of a $10,000 investment to roughly $175,000 over 30 years without requiring ongoing management.

My Preferred ETF for 2025

At the start of 2024, small-cap stocks were at their lowest price-to-book ratios compared to large caps since the late 1990s. Throughout the year, this valuation difference grew further, influenced by large-cap tech stock performances and unexpected interest rate trends.

The average price-to-book ratio for the Russell 2000 small-cap index is around 1.9, whereas typical stocks in the S&P 500 sit at 4.7. With a decline in interest rates on the horizon and a potentially growth-friendly environment with upcoming leadership changes, small caps could benefit significantly. Hence, my top ETF pick for 2025 is the Vanguard Russell 2000 ETF (VTWO).

Gaining AI Exposure Without Company-Specific Risks

Artificial intelligence (AI) represents a vast opportunity and may become the defining tech trend of my lifetime. However, my expertise lies mainly in sectors like banking, real estate, and e-commerce—a bit outside the AI realm. Recognizing one's own strengths and limits as an investor is essential.

Thus, I'm looking to build a position in the Ark Autonomous Technology and Robotics ETF (ARKQ), managed by Cathie Wood's Ark Invest. This fund is known for its carefully curated portfolio of stocks that are likely to become major players in the AI sector. It includes well-known companies like Nvidia and Tesla, as well as lesser-known firms like Kratos Defense & Security and distinctive AI-related players like Deere.

This ETF comes with a relatively higher expense ratio of 0.75%, typical for specialized, actively managed funds.

Positioning These ETFs Within My Portfolio

While I maintain a strong foundation in individual stocks, I've started to create a solid backbone for my portfolio using quality index funds. As I move into 2025 and beyond, I aim to allocate half of any fresh funds in my brokerage account to stocks and the other half to these three ETFs.

ETFs, Investing, Stocks