4 Vanguard Stock ETF Picks For 2025
With such a wide range of potential outcomes this year, risk management and value capture will be important themes.
Vanguard had another huge year in 2024. The industry giant pulled in another $300 billion in net new investor money into its ETFs and just surpassed the $3 trillion mark in total ETF assets. It still trails BlackRock as the world’s largest ETF issuer, but it’s still clearly within reach of taking the title eventually.
In terms of Vanguard’s equity ETF offerings, however, the market didn’t really do them any favors. The Vanguard S&P 500 ETF (VOO) and the Vanguard Total Market ETF (VTI) remain the tentpoles of the lineup, but most of the company’s most popular stock ETFs didn’t fall in the market’s sweet spot.
The Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM) both lagged the S&P 500 by a wide margin as dividend stocks remained firmly out of favor (although they both performed in the upper half of the U.S. dividend ETF category). Outside of the Vanguard Growth ETF (VUG) and its other growth ETFs (VOOG) (VONG) (MGK), the company wasn’t really able to capitalize on trends, such as AI, crypto or the magnificent 7. Vanguard has always been more conservative with its ETF offerings and 2024 really exemplified that.
But 2025 is a new year!
For the first time in two years, it looks like conditions might finally begin working against U.S. stocks. The economy still looks like it’s in good shape, but the Fed is no longer expected to assist with a significant monetary easing cycle. Inflation looks like it’s becoming problematic again. Tariffs threaten to spike inflation again and bring the global economy grinding to a halt. The S&P 500 already looks like it’s running out of gas (it’s been virtually flat for the past two months) and things could get worse if the above catalysts start resulting in a valuation contraction.
That makes picking winners for the coming year always a challenge. A lot can happen in the next 12 months, both good and bad. After back-to-back 20%+ gains in the S&P 500, a three-peat would seem unlikely, but we’re still in the midst of a period of unbridled optimism for mega-caps, tech, bitcoin and AI.
With all that being said, let’s take a look through Vanguard's equity ETF lineup to identify four funds that could do particularly well over the next 12 months.
Vanguard Energy ETF (VDE)
It’s kind of amazing to think how far the energy sector has come over the past two decades. Around the financial crisis in 2008, energy was the largest sector in the S&P 500 during the oil price boom when it account for roughly 16% of the index. Since then, it’s underperformed the S&P 500 pretty much non-stop (save for the year or so around the post-COVID boom). Years of zero interest rates and nearly unlimited liquidity have pushed growth sectors to the forefront and left most everything else in its wake. Today, energy accounts for just 3.5% of the S&P 500.
As a cap-weighted index, energy has one of the biggest top heaviness problems in the U.S. equity market. ExxonMobil and Chevron alone account for roughly 1/3 of the sector. Overall, however, there is a fairly sizable mid-cap component to the portfolio. That kind of exposure has helped work against it in the recent past, but it could turn into a benefit should investors begin giving up their fascination with only mega-cap names.
Why This ETF Is A Top Pick
OK, bad news first. Energy demand has been weak and is forecast to get weaker in 2025. China, a major consumer of oil, is in economic purgatory as it struggles to reignite consumer demand. With Asia struggling and Europe on the brink of recession, the U.S. may be the only world economy where energy demand is expected to hold steady. This could all suppress oil prices and energy stocks in the process.
But here’s where optimism comes in. The new Trump administration has vowed to “drill, drill, drill” and discard pretty much any effort or legislation that would promote or build out clean energy infrastructure. OPEC has also been managing its production quotas in order to keep oil prices elevated or at least stable in an environment featuring weak demand. China, for all of its problems, has pledged a major stimulus package in the near future designed to increase consumption and demand on both the retail and commercial sides of the economy. If that comes to fruition, the outlook for crude could improve quite a bit.
And then there’s simply the fundamental viewpoint. The energy sector trades at just 14 times next year’s earnings compared to 23 for the S&P 500. It currently pays a 3-4% dividend yield and is the home of some of the biggest cash flow generators in the world. That’s not to say that energy will necessarily outperform if the global economy contracts. But there are plenty of potential catalysts working in its favor that could make it a leader again.
Vanguard Mid Cap ETF (VO)
If it has been mega-caps, growth or tech, it’s very unlikely to have beaten (or even matched) the S&P 500 over the past two years. Such is the case with mid-caps, which are supposed to bridge the gap between growth potential and not paying a premium price. Mid-caps overall currently trade at a 15-20% valuation discount compared to large-caps, yet carry the same PEG ratio. Historical earnings growth and margins have been lower than those of the S&P 500, thanks to magnificent 7 dominance, but there’s an attractive balance still present here.
Mid-caps kind of get lost in the shuffle since investors only seem to like comparing large-caps to small-caps. Over the past 20 years, however, the S&P 400 Mid Cap Index has beaten the S&P 500 by a 2,700% to 2,100% margin. They often get unfairly ignored, but they shouldn’t.
Why This ETF Is A Top Pick
With so many potential outcomes in 2025, mid-caps could again strike a nice middle ground for investors. If the economy continues growing and some of the bigger risks turn out to be not so bad, mid-caps could ride the wave and get an additional boost from their inherent value. If things turn south, that same value could provide a degree of downside protection that mega-caps might not enjoy. If rates and inflation remain elevated, mid-caps should be better positioned than small-caps since they’re likely to be less debt reliant than smaller companies.
Overall, I like the balance between growth and value in this group, especially since the range of outcomes this year seems particularly wide.
Vanguard U.S. Quality Factor ETF (VFQY)
Vanguard’s factor ETF lineup doesn’t get a lot of attention since it’s never really resonated with investors in a major way. This fund has been around for nearly 7 years and still has only $400 million in assets, a great number for most issuers, but a disappointment from Vanguard. But those numbers are irrelevant to investors as long as the fund is cheap and trades relatively easily. Its trading spread is a little on the high side, which adds to total cost, but it’s still within a reasonable range overall and that means we should judge the fund by its merits.
VFQY uses a rules-based quantitative model to evaluate U.S. common stocks targeting those with strong fundamentals. It includes a diverse mix of stocks within a variety of sectors across all market caps. Quality is measured looking at fundamental factors, such as return on equity, profitability, changes in net operating assets and leverage. As it stands right now, the fund has around 380 individual holdings.
VFQY actually rates as more of a mid-cap ETF and has only a 17% overlap with the S&P 500 (overweights to cyclicals and underweight to tech). That makes it a relatively good diversifier to a broader portfolio.
Why This ETF Is A Top Pick
Is there ever really a bad time to own quality in your portfolio? In 2024, the quality factor was one of the few that actually kept up with the S&P 500. Granted, that had a lot to do with the heavy mag 7 presence in the portfolio, but it demonstrates that this factor can still do quite well even as the market has very narrow leadership at the top.
Given VFQY’s mid-cap tilt, my selection of VO earlier and quality’s performance last year in a mixed macro environment, I think it makes sense to marry these two things together in a single fund. We’ve already got indications that credit conditions in the United States are worsening. Economic conditions all around the world are, to put it charitably, challenged. If those conditions persist and inflation remains sticky as ever, this could be a very good time to be focusing on high quality companies with the financial strength to weather these conditions.
Vanguard FTSE Emerging Markets ETF (VWO)
I’ve thought there’s been a strong case for emerging markets at multiple points over the last several years and I’m still waiting for the story to play out. Emerging markets have done pretty much nothing but underperform the S&P 500 steadily ever since 2010. Except for a few periods that teased investors with their potential, emerging markets have been little more than dead money for more than a decade.
VWO is a fairly standard cap-weighted index of nearly all emerging markets equities (nearly 6,000 individual positions in the fund). It does exclude China A shares, which could be viewed as a negative since I consider them to have better growth prospects than the broader China index, but it’s probably a non-factor in this portfolio. China, India and Taiwan account for more than 70% of this portfolio, so you’re really getting Asia exposure more than anything. If you’re looking for Europe or Latin America, better look elsewhere. There’s almost none of that here.
Why This ETF Is A Top Pick
Acknowledging the dangers in going to the emerging markets well one more time, there are actually a few things that could make this an interesting pick for 2025.
First is China. As mentioned earlier, China is likely to inject a major stimulus package into its economy at some point this year. In 2024 when the Chinese government hinted at this, Chinese stocks rallied more than 30% in short order. Those gains subsided after China failed to really follow up on that, but it’s clear that share prices are ready to rally should we get some more concrete details around this package.
India’s economy looks like a real bright spot, although it’s been slowing recently. Emerging markets have long been a China story and any expansion beyond that helps craft a positive long-term narrative.
Value, of course, is a constant reason for hope. The major valuation metrics - P/E, P/B and P/S - are all roughly half that of the S&P 500. Of course, it’s been that way for years and there’s no guarantee that this value will ever be unlocked, but it’s still there. Then there’s just the idea of a plain old mean reversion. 14 straight years of underperformance isn’t sustainable and a stretch favoring emerging markets should come before too much longer. Of course, I’ve said that for a while and it has yet to happen.
Conclusion
2025 might be a year of risk management more than anything. With an uncertain global economy, the risk of re-inflation, the negative impact of tariffs and a lack of Fed support, there’s going to be plenty of opportunity for the market to turn south this year.
The ETF picks above represent at least some degree of risk hedge to that occurring, more on the valuation side than anything. Still, there’s a concrete investment case for each one. We just need to see if they finally play out.
Good overview and reasoning. Thanks for sharing.