Tag: artificial intelligence

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Returns in 2025 for U.S. Stock ETFs: A Strong Year

The U.S. stock market delivered solid returns in 2025. Investors benefited from artificial intelligence enthusiasm, late-year Federal Reserve rate cuts, and strong earnings across several key industries. According to The Wall Street Journal, U.S. stock funds and ETFs returned an average of about 14.6% for the year. Consequently, 2025 marked a third consecutive year of double-digit gains. As we discussed previously, the market performed well despite heightened volatility early in the year,

At the broad market level, the S&P 500 (ticker: IVV) posted a robust 17.8% total return for the year. Large-cap technology and cyclical shares contributed most significantly, according to ETFReplay.com and Yahoo Finance. The Nasdaq-100 (ticker: QQQ) outperformed the broader market. Mega-cap tech names continued to anchor market breadth late into the year as optimism around AI deployment persisted.

Total Returns in 2025 for the S&P 500, Nasdaq, and other U.S. Sectors ETFs. Source: ETFReplay.com
Total Returns in 2025 for the S&P 500, Nasdaq, and other U.S. sector ETFs. Source: ETFReplay.com

Sector Leaders and Laggards

Sector ETF returns in 2025 highlighted both rotation and concentrated leadership:

  • Communication Services (XTL) was the top performer, benefiting from investments in data centers and cloud computing.
  • Technology (XLK) was among the top performers, with total return growth powered by demand for semiconductors, AI infrastructure, and software. Many XLK holdings significantly outpaced the broader market over multiple time horizons.
  • Industrials (XLI) also delivered strong returns as economic activity and capital investment improved, reflecting strength in industrial and transportation names.
  • Financials (XLF) and Healthcare (XLV) logged solid gains, as bank profitability rebounded and health care stocks rallied on earnings beats and defensive positioning.
  • Utilities (XLU) and Consumer Staples (XLP), traditionally defensive sectors, generated positive but more modest returns, with staples lagging as investors favored growth-oriented ETFs.
  • Materials (XLB) and Energy (XLE) posted marginal returns, supported by commodity demand and stable energy prices, but lacked the momentum seen in tech and cyclical sectors.
  • Consumer Discretionary (XLY) saw mixed performance, often tied to retail sentiment and macroeconomic shifts throughout the year.

Market Themes from Returns in 2025

While AI-linked ETFs — including in XLK and QQQ — powered much of the returns in 2025, concerns about valuation and potential “AI bubble” dynamics persisted. Broad macro swings — from tariff-driven drawdowns to four rate cuts by the Federal Reserve — underscored a year of notable volatility even as the market finished strong.

In summary, 2025 rewarded long-term investors with healthy total returns but also demonstrated the importance of sector diversification — as illustrated by the contrasting performance among ETFs like XLK, XLI, XLF, and defensive plays like XLU and XLP.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

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AI and the S&P 500

Artificial intelligence (AI) continues to impact markets like the S&P 500 in 2024. If you are already invested in broad-based ETFs, you may be invested in AI, whether you realize it or not. In this post, we discuss how AI companies are influencing cap-weighted indices.

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Fear of Missing Out

Jason Zweig at The Wall Street Journal recently wrote an article about one of the leading AI companies Nvidia. In his article, he noted how this company was now more than 4% of the S&P 500 index, thanks to its recent rise in share price.

And, other companies working in the AI space are also seeing very positive share price increases, like Microsoft. In fact, according to this page on ETF.com, Microsoft and Nvidia now account for about 11.5% of the S&P 500 index. This weighting of AI in the S&P 500 is due to the S&P 500 being a “cap-weighted” index.

A stock market index wherein each component is weighted relative to its total market capitalization

What is a Capitalization-Weighted Index? source: Corporate Finance Institute (CFI)

So, even if an investor thinks they may have “missed out”, they have not if they owned an S&P 500 ETF or some other cap-weighted index fund.

Other firms in the S&P 500

Because the S&P 500 is cap-weighted, the firms in this index become more (or less) significant as their market capitalization increases (or decreases). The image below shows the current top-10 holdings in the S&P 500 ETF (ticker: IVV). Note that over half of those in this list are tech firms that are at the forefront of AI. In fact, for investors in Apple, there may not be enough investment in AI.

Top 10 holdings in the S&P 500 ETF IVV. Source: etf.com
Top 10 holdings in the S&P 500 ETF IVV. Source: etf.com

ETF investor options to embrace or avoid AI

Hopefully, ETF investors realize that they may already have AI investments, if they are invested in one of the ETFs tracking the S&P 500, like VOO, IVV, or the oldest ETF SPY. Alternatively, ETF investors wishing to embrace AI more may seek tech-centric ETFs, like XLK. Or, by seeking dividend-paying stocks not seeking growth from AI, an ETF investor may seek funds like DVY or VTV. Investor preference for growth in the AI space will likely affect investments for many years to come.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs