The S&P 500 (^GSPC -0.30%) is on track to finish above 20% for the seventh time in the 21st century. If it gains only a little momentum, it could end the year up over 30% for the first time since 1997.
Will the widely followed index deliver strong returns again next year? Maybe. However, I predict five high-flying Vanguard exchange-traded funds (ETFs) will trounce the S&P 500 in 2025.
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Vanguard’s five birds of a feather for 2025
The five Vanguard ETFs I’m especially bullish about for next year are birds of a feather:
- Vanguard Small-Cap ETF (VB -0.78%)
- Vanguard Small-Cap Value ETF (VBR -0.62%)
- Vanguard S&P Small-Cap 600 ETF (VIOO -0.36%)
- Vanguard Russell 2000 ETF (VTWO -0.41%)
- Vanguard Russell 2000 Growth ETF (VTWG -0.57%)
You might have spotted the key common denominator for these funds: They all focus on small-cap stocks. The first three even have “small-cap” in their names. The names of the last two ETFs also provide a big hint about their investment strategies with references to the Russell 2000 index, which includes small-cap stocks.
Each of these Vanguard ETFs has performed well this year, although none has delivered returns as high as the S&P 500. The Vanguard Rusell 2000 Growth ETF is the biggest winner of 2025 in the group, trailing a few percentage points behind the S&P 500.
^SPX data by YCharts
Another commonality between these Vanguard ETFs is their low costs. Their annual expense ratios range from 0.05% for the Vanguard Small-Cap ETF to 0.15% for the Vanguard Russell 2000 Growth ETF.
Each ETF also owns a large number of stocks. The Vanguard Small-Cap Growth ETF ranks at the bottom of the list on this front with 603 stocks. The Vanguard Russell 2000 ETF owns the most stocks (1,995).
The main differences between these ETFs are their underlying indexes. The Vanguard Small-Cap ETF and the Vanguard Small-Cap Value ETF use CRSP small-cap indexes. The Vanguard S&P Small-Cap 600 ETF uses the S&P 600 Small-Cap Index. The Vanguard Russell 2000 ETF and the Vanguard Russell 2000 Growth ETF obviously use the Russell 2000 indexes. One of these ETFs focuses on small-cap growth stocks (the Vanguard Russell 2000 Growth ETF), while one focuses on small-cap value stocks (the Vanguard Small-Cap Value ETF).
Why these Vanguard ETFs could trounce the S&P 500
I think these five Vanguard ETFs could trounce the S&P 500 in 2025 for one simple reason: Small-cap stocks are poised to outperform large-cap stocks. Why? In my view, three factors especially stand out.
First, there is a significant valuation gap between small-cap and large-cap stocks. For example, the S&P 500 (which features stocks of the 500 largest U.S. companies) trades at nearly 27 times earnings. Each of these Vanguard ETFs sport much lower earnings multiples.
Over the long term, small-cap stocks have outperformed large-cap stocks. This hasn’t been the case in recent years, as the valuation gap reflects. However, I fully expect a reversion to the mean is on the way with small-cap stocks again delivering higher returns than large-cap stocks.
That leads me to the second key factor behind my optimism about these Vanguard ETFs. The Federal Reserve has begun lowering interest rates for the first time in four years. Small-cap stocks tend to respond more positively to rate cuts than large-cap stocks do.
What’s the third factor? The policies of the incoming Trump administration could benefit small-cap stocks more than large-cap stocks. In particular, deregulation should be welcome news for companies of all sizes but could help smaller companies the most.
What could get in the way?
Am I completely confident these five Vanguard ETFs will trounce the S&P 500 in 2025? I wouldn’t go that far. A few things could get in the way of my prediction coming true.
It’s possible that the economy could suffer next year (perhaps ignited by the implementation of high tariffs). Small-cap stocks often perform worse than large-cap stocks during economic declines.
I also don’t rule out the possibility that the artificial intelligence (AI) boom that has been one of the primary catalysts behind the S&P 500’s tremendous gains over the last couple of years could keep going. If so, large-cap stocks in the S&P 500 might continue their outperformance versus small-cap stocks.
Still, I believe the odds are pretty good that these five Vanguard small-cap ETFs could beat the S&P 500 next year. More importantly, I think all of them are great picks for investors over the long term.
Keith Speights has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Small-Cap ETF. The Motley Fool has a disclosure policy.
