Here's What the 3 Best-Performing Vanguard Sector ETFs in 2025 All Have in Common

The S&P 500 has had a volatile start to 2025 but has still managed to gain 3.8% year to date as of market close on Jan. 24. And some sectors already stand out as top performers in the new year.

Investment manager Vanguard offers exchange-traded funds (ETFs) that mirror each of the 11 stock market sectors. Among them, the Vanguard Industrial ETF (NYSEMKT: VIS), Vanguard Energy ETF (NYSEMKT: VDE), and Vanguard Materials ETF (NYSEMKT: VAW) are all beating the S&P 500 so far this year. Each fund has a higher expense ratio of 0.1% compared to 0.03% for the Vanguard S&P 500 ETF (NYSEMKT: VOO) -- but the difference is only $7 in fees for every $10,000 invested.

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Here are similarities among each sector, why they look poised for growth in 2025, and why each Vanguard sector ETF could be worth buying now.

Image source: Getty Images.

2024 underperformers

Industrials, energy, and materials lagged the S&P 500 in 2024, while the best-performing sectors -- communications, financials, and consumer discretionary -- crushed the index.

VOO data by YCharts.

Megacap stocks, especially growth stocks like Nvidia, Meta Platforms, and Broadcom, helped carry the S&P 500 to new heights in 2023 and 2024. Many industrial stocks finished the year around all-time highs as well; they just didn't grow at the same pace as hotter sectors.

Oil and gas prices cooled off after a big rally in 2021 and 2022, dragging down the energy sector in 2024. Meanwhile, materials stocks have been heavily affected by inflation, global competition, and higher interest rates that have increased the cost of capital and slowed demand for commodity products.

A rebound in 2025

The industrial, energy, and materials sectors all benefit from economic growth and investor preference for value and income stocks instead of growth. There seems to be investor optimism toward those themes, which may be why all three sectors are outperforming the index so far this year.

VIS data by YCharts.

Oil prices rocketed higher to start the year, helping the Vanguard Energy ETF soar nearly 10% in a few weeks. A new administration favorable to boosting domestic oil and gas production could help spur a flurry of investment in the sector, but could also lead to higher oil and gas supplies and lower prices.

The industrial sector generally benefits from economic growth, infrastructure investments, deregulation, and tax cuts. The new administration's emphasis on America-first policies could help spur an increase in domestic manufacturing and accelerate growth.

There has also been a wave of structural change across the sector, with companies like Honeywell International considering moving away from the conglomerate business model to drive efficiency.

The sector is also reasonably valued, with the Vanguard Industrial ETF having a 26.7 price-to-earnings ratio (P/E) compared to 28.2 for the S&P 500. All told, the sector offers a balance of growth and decent value.

The materials sector contains a variety of chemical companies; industrial products producers; steel, aluminum, copper, and other metals companies; paper, plastic, and packaging products, and more. As mentioned, the sector is highly cyclical and sensitive to interest rates. It is also sensitive to the global economy, so slowdowns in China and Europe have hit the sector hard.

However, increased domestic manufacturing and deregulation could be a boon for the sector. Think about all the chemicals, metals, and plastics used in manufacturing and packaging. From residential and commercial construction to automaking, consumer goods, and more, the materials sector is a big-time winner from economic growth. Higher interest rates make it harder to finance expansions, so the sector could be held back until rates come down.

Still, the materials sector is a compelling value, especially in a relatively expensive market. The Vanguard Materials ETF has a P/E ratio of 23.5 and a yield of 1.7%, making it worth a closer look for value and income investors.

These ETFs are worth a closer look

The energy, industrial, and materials sectors could all appeal to investors looking to put new capital to work into passive investment vehicles that are targeting more value-focused pockets of the markets.

As is true with any ETF, it's important to go through the list of holdings to ensure you aren't accidentally overly increasing your exposure to a company you already own.

For example, ExxonMobil and Chevron are massive oil and gas companies and make up around 34.7% of the Vanguard Energy ETF. So if you already own a significant amount of these oil majors, you may want to look closely at other oil and gas companies instead of the ETF.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.