2024 isn't set in stone yet, but it's already been a great year for stocks.
Until November 21st. S&P500 Artificial intelligence (AI) continues to be the dominant topic in the stock market, with big tech stocks like the Magnificent Seven leading the way, with stocks up 24.7% year-to-date.
With that in mind, you might expect the best-performing Vanguard exchange-traded funds (ETFs) to come from the tech sector. in the end, Nvidia Stock prices have tripled this year, but Nasdaq Composite It only slightly outpaced the S&P 500 with a 26.4% gain and the popular Nasdaq-100 underperformed the broader market index with a return of 23.3%.
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Perhaps surprisingly, the best-performing Vanguard ETF has nothing to do with technology. Instead, it is Vanguard Financials Index Fund ETF (VFH 1.25%)up 33.6% year-to-date through Nov. 21.
As you can see in the graph below, the financial sector stayed in line with the S&P 500 through most of the year, before gaining some defection in the fourth quarter and spiking following the election results.
^SPX Depends on the data Y chart
Why finance has the upper hand
The Vanguard Financial ETF's largest holdings include top banks, credit card companies; Berkshire Hathawayconsiders insurance to be its largest segment.
Financial stocks have many attractive qualities in the current market. First, they are highly cyclical. Banks and credit card processors believe that business expands when the economy expands and consumers and businesses have confidence in continued growth. Banks rely on loans and fees to make money, and credit card processors also rely on how consumers spend their money.
Both types of companies can benefit from higher interest rates because they can collect more interest on their debt. Therefore, an economy with stable growth with high interest rates and low unemployment is an advantageous situation for the financial sector.
Moreover, these stocks soared after the election as investors expected the incoming administration's policies to give momentum to the sector. Investors are hoping the Trump administration will loosen restrictions on mergers and acquisitions, a valuable source of income for banks. In a specific case like wells fargoinvestors are also hoping that asset caps that limit business capacity will be lifted.
Finally, investors also expect the Trump administration to cut taxes, which will be a general boon for the economy, especially the financial sector.
Can financial stocks continue to rise in 2025?
Even after the rally in 2024, financial stocks still look cheap compared to the broader market. The Vanguard Financials ETF currently trades at a price-to-earnings ratio of 16.5x, which compares favorably with the Vanguard S&P 500 ETF's P/E ratio of 29.7x.
Because financial stocks are highly cyclical and susceptible to recessions, they tend to be cheaper than the broader market, and the sector's growth rate tends to be lower than, for example, the tech sector. However, the ETF has reported average annual earnings growth of 12.6% over the past five years, which is a solid number for any stock group.
The fund's performance next year will likely depend on the overall health of the economy and the Trump administration's ability to meet some of Wall Street's expectations for the fund.
However, current economic conditions are ideal for another strong year for financial stocks, with the economy healthy, interest rates rising moderately, and business and consumer confidence appearing to be rising. It seems that there is. It's difficult to be a top-performing ETF two years in a row, but the Vanguard Financials ETF seems likely to outperform again next year.
Wells Fargo is an advertising partner of The Motley Fool Money. Jeremy Bowman has a position at Wells Fargo. The Motley Fool has positions in and recommends Berkshire Hathaway and Nvidia. The Motley Fool has a disclosure policy.
