Currently, Vanguard provides over 80 ETFs that enable individuals to make passive investments in different benchmark indices, sectors of the stock market, fixed-income products, and more. Unsurprisingly, the top-performing ETFs in recent times have been those heavily invested in technology stocks of large-cap companies.
I think the conditions are set for the next 18 months or more to propel a different type of ETF to the forefront. This ETF does not include any technology sector stocks. With over 80 ETFs to choose from, it is challenging to predict a clear winner. However, if I had to make a bet on the top-performing Vanguard ETF by the end of 2025, it would be this one. Real Estate Exchange-Traded Fund by Vanguard ( VNQ -0.12% ) .
The Vanguard Real Estate Exchange-Traded Fund
The Vanguard Real Estate ETF is a type of index fund that focuses on investing in a collection of real estate stocks. It is a weighted index primarily made up of equity assets. Real estate investment trusts (REITs) Equity Real Estate Investment Trusts (REITs) are companies that primarily own tangible properties, rather than holding mortgages or other types of assets.
The fund has a minimal expense ratio of 0.13% and consists of 155 various stocks at present. The most significant holdings are comprised of Prologis ( PLD -0.44% ) , American Tower ( AMT 0.33% ) , Equinix ( EQIX -0.07% ) , and Welltower ( WELL 0.77% ) , among others.
At this moment, the Vanguard is ready. Exchange-traded fund focused on real estate properties In the past few years, its performance has been weak compared to the S&P 500, lagging behind by 9, 34, and 88 percentage points over the last one, three, and five years, respectively. However, there is a belief that the real estate sector is currently poised for a strong comeback, likened to a tightly wound spring ready to unleash potential.
What makes real estate a good investment in 2025?
Currently, the primary factor contributing to the attractiveness of real estate is the low interest rates. The Federal Reserve is the central bank of the United States. It is highly anticipated that the central bank will begin reducing interest rates at its September gathering, and is likely to persist in this course for an extended period. There are several factors explaining how declining rates may result in significant growth for the industry.
Initially, declining interest rates usually benefit stocks that focus on generating income. Without delving into the details of economics, the basic concept is that when risk-free interest rates decrease, stocks that prioritize providing income tend to perform well. Government bonds When interest rates rise and CDs lose their attractiveness, investors often shift their money towards stocks that pay dividends. While many major REITs have been successful in their operations, the Vanguard REIT ETF has experienced a significant drop of over 20% since the Federal Reserve started increasing rates in early 2022, primarily because of the impact of rising rates.
Decreasing interest rates can positively impact real estate stock prices, but it also has other advantages for REITs. Unlike other sectors, REITs often depend heavily on borrowed funds to expand their property portfolio, similar to how individuals use mortgages to purchase homes. Lower interest rates can result in reduced borrowing expenses, making the prospect of expansion more attractive. In recent years, some REITs have experienced sluggish growth due to high capital costs, prompting them to limit their expansion efforts.
Other ETFs also have the potential to succeed.
Certainly, there are various sectors in the market that have the potential to perform well when interest rates decrease. I have specifically identified the Vanguard Russell 2000 exchange-traded fund. ( VTWO -1.13% ) and the ETF stands for Exchange-Traded Fund, and Vanguard Small-Cap Value ETF is a type of ETF that focuses on small-cap value stocks. ( VBR -0.89% ) In additional writings, I anticipate the upcoming years to be favorable for small-cap and value stocks. I have investments in both and am confident that they have the potential to surpass the performance of the S&P 500 for multiple years at the very least.
When it comes to different segments of the stock market, it is challenging to argue that any are more influenced by interest rate changes than Real Estate Investment Trusts (REITs). Therefore, with the Federal Reserve starting to reduce interest rates, I believe that real estate will be the top-performing sector from the current time until the end of 2025.
