The stock market has tearful in the past few years. this S&P 500 Index It is expected to achieve an increase of more than 20% for many consecutive years, while technology stocks mainly Nasdaq 100 Index Almost doubled since the beginning of 2023.
Investors can only purchase exchange traded funds(ETF) watch the S&P 500 or Nasdaq 100 in hopes of continued gains. However, a smarter The best strategy is to buy ETFs that will benefit from significant catalysts in 2025. federal funds rate (even if it’s slower than expected). This should favor income-focused funds, such as those holding dividend-paying stocks, bonds and real estate. Here are three smart ETFs worth considering buying to take advantage of this potential catalyst in the year ahead.
Dividend stocks have underperformed the market this year. that is partially due Interest rates continue to weigh on the valuations of high-yield dividend stocks. For example, Schwab U.S. Dividend Stocks ETF(NYSE: SCHD) Prior to its recent decline, its total returns were already lower than those of the S&P 500:
SCHD total return level data provided by YCharts
In the process, the valuation gap between the two has become wider and wider. Schwab’s ETFs average transaction P/E ratio ratio At 18.4, it’s much cheaper than the broader index, which is dominated by technology stocks, with a ratio of 25.8.
Dividend ETFs also offer The dividend yield is much higher – 3.3%, compared to the S&P 500’s 1.2%. To put this yield into perspective, a $1,000 investment in this fund will generate approximately $33 in dividend income in 2025. higher source of income will If the market corrects next year, it could help cushion the blow.
This income stream is likely to increase over the next year, given the fund’s focus on high-quality, high-yielding dividend stocks Those who have Proven track record of growing dividends. In addition to higher income, Schwab U.S. Dividend Stocks ETF As interest rates fall, investment returns should rise, increasing the fund’s total return potential.
bonds are very sensitive Interest rates change, and prices rise when interest rates fall. Therefore, if the Fed continues to cut interest rates, bonds may generate higher total returns next year.
this Vanguard Total Bond Market ETF(Nasdaq: BND) is a good way Invest broadly in the bond market. The fund holds more than 11,300 bonds. The U.S. government backs nearly 70% of its bond holdings, with the rest coming from investment grade Corporate issuer. This makes these bonds a very low-risk investment.
The bond’s current average yield to maturity 4.6%. At this rate, a $1,000 investment will generate approximately $46 in interest income over the next year. The bottom line is that as interest rates rise, the value of bonds should continue to rise, increasing investors’ total return potential next year.
Like bonds and dividend stocks, the value of commercial real estate is very sensitive to interest rates. In recent years, property values have declined as interest rates have risen. However, as interest rates begin to fall, commercial real estate values should recover over the next year.
this Vanguard Real Estate ETF(NYSE:VNQ) A great way to invest in a potential real estate recovery. The fund invests primarily in real estate investment trusts (REIT), entity Owns a large commercial real estate portfolio. The fund currently holds more than 150 REITs.
REITs typically pay above-average dividends because the IRS requires them to distribute at least 90% of their taxable net income to investors each year. As a result, the fund currently offers an attractive yield of 3.3%.
In addition to dividend income, the fund’s value will rise over the next year as real estate values increase. This could allow the ETF to generate strong total returns. Over a long period of time, Historically, REITs have outperformed stocks. With REIT values currently falling, REITs are more likely to outperform stocks.
The Fed appears poised to continue cutting interest rates next year, although officials have lowered their forecast for two rate cuts from four. This catalyst should boost the value of income-producing investments like dividend stocks, bonds and real estate. As a result, ETFs focused on investments like the Schwab US Dividend Equity ETF, Vanguard Total Bond Market ETF, and Vanguard Real Estate ETF look like smart buys as we head into the new year. If stocks take a breather, they could outperform broader ETFs.
Before you buy shares of the Schwab US Dividend Equity ETF, consider the following factors:
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Matt DiLallo holds a position in the Vanguard Total Bond Market ETF. The Motley Fool owns and recommends the Vanguard Real Estate ETF and the Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
Got $1,000? 3 smart ETFs worth buying before 2025 starts. Originally published by The Motley Fool
