My 3 Top ETFs to Buy in February

I'm planning to put some money to work in the stock market in February, but most of it will be allocated to exchange-traded funds, or ETFs. While I think there are some excellent opportunities in individual stocks right now, there are also some excellent tailwinds and market trends that have made entire industries, sectors, and areas of the market attractive right now.

With that in mind, here are my top three ETFs to buy in February. I already own one of them, but plan to add the other two to my portfolio shortly.

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Two big tailwinds for financial stocks

The financial sector could be a big winner over the next few years, and for two main reasons. And that's why I think the Vanguard Financials ETF (NYSEMKT: VFH) could be a smart index fund to take a closer look at.

First, the financial industry is likely to be a big beneficiary of falling interest rates. As rates sharply increased in 2022 and 2023, banks' net interest margins came under pressure. In simple terms, the cost of deposits increased faster than the yields from banks' loan portfolios. But as rates fall, the opposite could be true.

There's also a potential regulatory tailwind to consider. The new administration is generally in favor of looser regulations, which could benefit the entire financial services industry. Plus, President Trump campaigned on a 15% corporate tax rate, and with most banks' effective tax rates above 20%, this industry stands to benefit tremendously.

The Vanguard Financials ETF tracks a weighted index of over 400 financial sector stocks. Top holdings include JPMorgan Chase (NYSE: JPM), Berkshire Hathaway (NYSE: BRK.B), Mastercard (NYSE: MA), Visa (NYSE: V), and Bank of America (NYSE: BAC).

A massive valuation gap

It's tough to overstate just how cheap small-cap stocks are right now relative to their large-cap counterparts. The average S&P 500 (large cap) stock trades for a price-to-book ratio of 4.8. On the other hand, the average Russell 2000 (small cap) stock trades for just 2.0 times book value.

The last time the valuation gap was this wide was the late 1990s, and small caps went on to outperform for more than a decade afterward. And while this doesn't necessarily mean the same thing will happen this time, a falling interest rate environment could provide the catalyst to make it happen. In addition to the largest S&P 500 components generally trading at lofty valuations, small cap stocks as a group are more reliant on debt and could benefit from rate cuts more than their larger counterparts. Plus, a lower-regulation climate could make it generally easier for smaller companies to compete with the big players in their industries.

I've called the Vanguard Russell 2000 ETF (NASDAQ: VTWO) my top overall ETF idea for 2025, and I stand by that statement. I have been building a position rather aggressively in my portfolio, and plan to continue to add shares.

One of these things is not like the other

I generally consider myself to be best at evaluating stocks in the financial and real estate sectors. Artificial intelligence (AI) stocks are generally outside my circle of competence, at least when it comes to figuring out the top stocks to buy. But I also know enough to understand AI is a massive opportunity, so instead of trying to pick one or two AI winners, I have my eye on the ARK Autonomous Technology & Robotics ETF (NYSEMKT: ARKQ).

This ETF isn't an index fund like the other two. It is an actively managed fund, with portfolio manager and notable tech investor Cathie Wood calling the shots. And perhaps the biggest reason I'm a fan is that unlike most other AI ETFs in the market, some of the largest positions are under-the-radar names you may not have heard of.

Sure, some of the fund's holdings are household AI names, including Tesla (NASDAQ: TSLA), Nvidia (NASDAQ: NVDA), and Amazon.com (NASDAQ: AMZN), but among the top 10 holdings you'll also find the likes of Kratos Defense & Security (NASDAQ: KTOS) and Teradyne (NASDAQ: TER), just to name a couple.

Buy for the long term

It's important to emphasize that I'm not buying these ETFs just because I think financials and small caps will do well this year, or because many AI stocks just took a beating and I think they'll rebound quickly. I'm buying these because I think they're excellent long-term investments that happen to have attractive entry points right now, and I'm planning to hold all of them for years to come.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matt Frankel has positions in Amazon, Bank of America, Berkshire Hathaway, and Vanguard Russell 2000 ETF. The Motley Fool has positions in and recommends Amazon, Bank of America, Berkshire Hathaway, JPMorgan Chase, Mastercard, Nvidia, Tesla, and Visa. The Motley Fool recommends Teradyne. The Motley Fool has a disclosure policy.