The end of a year is a time for rebalancing portfolios. Part of that process is analyzing what worked well in the current year and where your investment thesis may need to change in the new year.
Several factors suggest the market could deliver strong results in 2025. Lower corporate taxes and increased M&A activity are likely to lift earnings, while robust investor sentiment adds even more momentum. Together, these elements give investors ample reason to anticipate a strong year ahead.
Exchange-traded funds (ETFs) can play a role in delivering market-beating returns. These funds let you own a wide assortment of stocks while providing a built-in hedge against risk. For many investors, that means buying an ETF like the Vanguard S&P 500 ETF (NYSEARCA: VOO). This fund tracks the performance of the S&P 500 and is a set-it-and-forget-it choice for many investors.
However, as the new year approaches, investors can find several sectors that analysts believe will outperform the broader market in 2025. In fact, there may be so many to choose from that you’ll struggle to get exposure to everything through individual stocks.
That’s where thematic ETFs can play a critical role. These funds let you target your investments into funds that align with the themes you believe will drive the market. While there are more than three names you can consider for 2025, here are three of the best thematic ETFs for investors to consider.
Pacer US Cash Cows 100 ETF
If you believe that a company’s cash position is a solid predictor of future growth, the Pacer US Cash Cows 100 ETF (BATS: COWZ) may be a solid choice. The fund selects its holdings based on a company’s free cash flow (FCF). That is how much cash a company has left after paying its expenses, interest, taxes, stock buybacks, and dividends. The companies in the COWZ ETF have more than double the market average FCF yield.
Specific to 2025, the COWZ fund tracks an FCF-weighted index of companies from the Russell 1000 Index. This provides investors with mid-cap exposure that is frequently lacking in many of the top ETFs. The strongest market growth is expected to occur in the small and mid-cap sectors, which have underperformed as the Federal Reserve raised interest rates, making the money supply more restrictive.
Of course, an emphasis on free cash flow may not appeal to aggressive investors who would prefer to see a company’s cash put back into growth initiatives. However, over 9% of the company’s 102 holdings are in companies involved in oil and gas exploration. That’s likely to be a strong growth sector in the coming year.
Global X U.S. Infrastructure Development ETF
Money from the Infrastructure Investment and Jobs Act (IIJA) signed in 2021 continues to make its way into the economy. In fact, most of the money from this act is contractually guaranteed through 2026. And with a new administration looking to onshore U.S. manufacturing, more money will continue to flow into this sector. That’s why the Global X U.S. Infrastructure Development ETF (BATS: PAVE) deserves strong consideration in 2025.
The incoming Trump administration is looking to implement a more conservative fiscal policy. However, the IIJA had strong bipartisan support. Why? Because infrastructure spending creates jobs. The incoming administration has bold plans for job creation that will rely on keeping the current infrastructure spending in place. Industrial stocks have been among the strongest performers since the presidential election.
The PAVE fund is up over 26% in 2024, which is in line with the return from the S&P 500. While skeptics will point to the fund trading near an all-time high, it’s important to note that institutional buying outpaces selling by a nearly 2:1 ratio in the last 12 months.
iShares Semiconductor ETF
Technology stocks, particularly those with artificial intelligence (AI), will continue to show strong growth in 2025. And while it’s fair to say you could invest in NVIDIA Corp. (NASDAQ: NVDA) and call it a day, the iShares Semiconductor ETF (NASDAQ: SOXX) gives you exposure to the entire semiconductor sector without having to pick specific winners and losers.
The SOXX fund has underperformed the market in 2024 with a gain of approximately 11%. However, analysts are forecasting that, largely due to AI, stocks in this sector will grow their earnings per share (EPS) by 32% in 2025. Investors looking to front-run that earnings growth could find the SOXX fund to be an attractive investment.
