The S&P 500 produced a total return of about 25% in 2024, the second consecutive year of 20% or higher returns from the benchmark index. That’s an impressive rebound from the 2022 bear market lows. However, there are some areas of the market that have performed even better.
It’s no secret that AI stocks have been leading the market higher, and one ETF in particular that looks intriguing is the Ark Autonomous Technology & Robotics ETF (ARKQ 0.90%), which returned 34% for investors last year and does things much differently from other AI ETFs you might be familiar with. But what you might not realize is that bank stocks handily outperformed the S&P 500 last year, and the Financial Select Sector SPDR ETF (XLF 0.84%) produced a total return of nearly 31%.
Despite the excellent performance, both ETFs could certainly outperform the market again in 2025. Here’s some key information about each, and what could propel them even higher this year.
A different kind of AI ETF
There are several artificial intelligence ETFs in the market, but most focus on the megacap tech stocks and other popular AI names.
The Ark Autonomous Technology & Robotics ETF is different than most other top AI ETFs. For one thing, it is an actively managed ETF, which means that the fund’s manager — in this case, Cathie Wood — hand-selects a portfolio of stocks with the goal of beating the comparable indexes. And second, Wood’s strategy generally ignores the megacaps and focuses on lesser-known names with lots of growth potential.
The Ark fund maintains a rather concentrated portfolio of just three dozen stocks, and while its top holding, Tesla (TSLA 3.06%) is certainly a household name, most of the other top holdings aren’t. Here’s a rundown of the second through fifth largest positions:
- Kratos Defense & Security (KTOS 0.03%)
- Teradyne (TER 0.60%)
- Archer Aviation (ACHR -2.97%)
- Rocket Lab USA (RKLB -2.60%)
If there are names on this list you aren’t familiar with, that’s kind of the point. But all are relatively small companies that have massive potential to grow, especially as AI technology evolves.
Banks could have some big tailwinds in 2025
The Financial Select Sector SPDR ETF is a large index fund that is designed to track the financial sector’s performance over time. It has a low 0.09% expense ratio and has more than $50 billion under management. It tracks a weighted index, meaning that larger financial sector stocks contribute more of the fund’s performance.
Top holdings of the ETF as of this writing include (in order) Berkshire Hathaway (BRK.A 1.42%) (BRK.B 1.11%), JPMorgan Chase (JPM 1.92%), Visa (V 0.75%), Mastercard (MA 0.30%), and Bank of America (BAC -0.24%). While it invests in 73 stocks altogether, it is rather top-heavy, with the top 10 positions accounting for about 54% of the total fund assets.
There are a couple of big reasons the financial sector outperformed in 2024. Most obvious is that the Federal Reserve started lowering interest rates, which should help lower banks’ cost of capital and boost net interest margins. In addition, many experts thought we’d see loan defaults spike and consumer spending plunge in 2024, and both fears ended up being overblown.
Looking forward, there’s the potential that interest rates will fall even further than initially expected in 2025, which is certainly helped by the recent tame inflation data. There are also potential political tailwinds — anticipation of which also probably helped the 2024 performance — as the new administration is generally in favor of looser regulations and lower corporate taxes, and banks tend to have some of the highest effective tax rates in the market.
Solid long-term investments
While I think both ETFs could outperform the S&P 500 again in 2025, there’s no way to know if they will. There’s a lot that could go wrong. For example, if inflation were to unexpectedly spike higher, the Federal Reserve could stop lowering rates or even raise them.
The point is that if you invest in either or both ETFs, do so because you like them as long-term investments, not because you think they’re going to perform well this year. Both bank stocks and AI companies have excellent long-term return potential, so invest with that in mind.
JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Matt Frankel has positions in Bank of America and Berkshire Hathaway. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, JPMorgan Chase, Mastercard, and Tesla. The Motley Fool recommends Rocket Lab USA and Teradyne and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
