Vanguard offers more than 80 ETFs as of this writing, with choices that allow people to passively invest in a variety of benchmark indices, stock market sectors, fixed-income instruments, and much more. And as you might expect, the best performers in recent years have been those with large portions of their assets invested in large-cap technology stocks.
However, I believe the catalysts are in place for the next year-and-a-half or so at a minimum to catapult another type of ETF to the top of the leaderboard. And it's one that doesn't own any tech sector stocks whatsoever. While it's tough to pick a winner out of over 80 different ETFs, if I had to put money on which Vanguard ETF will perform the best through the end of 2025, it would be the Vanguard Real Estate ETF (VNQ +0.92%).
The Vanguard Real Estate ETF
As the name implies, the Vanguard Real Estate ETF is an index fund that invests in a portfolio of real estate stocks. It is a weighted index composed mainly of equity real estate investment trusts (equity REITs), which essentially means companies that own physical properties, as opposed to mortgages or other assets.
The fund has a low 0.13% expense ratio, and there are currently 155 different stocks in the fund. Largest positions include Prologis (PLD +1.72%), American Tower (AMT +0.76%), Equinix (EQIX +1.74%), and Welltower (WELL +1.50%), just to name a few.
NYSEMKT: VNQ
Key Data Points
Now, the Vanguard Real Estate ETF has not been a strong performer in recent years. It has underperformed the S&P 500's total return by nine, 34, and 88 percentage points over the last one, three, and five-year periods, respectively. But there's an argument to be made that the real estate sector is like a loaded spring right now.
Why real estate in 2025?
By far, the biggest reason to like real estate right now is interest rates. The Federal Reserve is widely expected to start lowering rates at its September meeting, and to continue doing so for some time. And there are a few reasons why falling rates could lead to massive outperformance for the sector.
First, falling rates tend to be a positive catalyst for income-focused stocks. I'll spare you the economics lesson, but the general idea is that as risk-free interest rates fall and things like Treasury securities and CDs become less appealing, money tends to flow back into dividend-paying stocks. Most large REITs have performed quite well business-wise, but since the Fed's rate-hike cycle began in early 2022, the Vanguard REIT ETF has fallen by more than 20%, mainly due to rate-related pressures.
It isn't just that falling rates can be good for real estate stock prices. Their businesses can benefit as well. REITs tend to rely on borrowed money to a greater extent than other sectors, as most use leverage to acquire properties and grow, like how you or I might use a mortgage to buy a home. Lower rates can mean lower borrowing costs, which can make the economics of growth more appealing. Many REITs I follow have slowed their growth to a crawl in recent years, specifically because the cost of capital is too high.
There are other ETFs that could win as well
To be sure, there could be several areas of the market that could be big winners as rates fall. I've specifically called out the Vanguard Russell 2000 ETF (VTWO +0.21%) and the Vanguard Small-Cap Value ETF (VBR +0.42%) in other articles, as I feel the next few years will also be great for small caps and value stocks. I own both and believe that both could outperform the S&P 500 for several years at a minimum.
However, as far as stock market sectors are concerned, it's tough to make the argument that any are more rate-sensitive than REITs. So, as the Fed begins its rate-cutting cycle, I'd bet on real estate as the best performer from now through the end of 2025.
