Don’t Buy SPY Until You Look at These 2 ETFs First

There is a tendency among many investors to hold the SPDR S&P 500 ETF Trust (NYSEARCA:SPY | SPY Price Prediction) and nothing else. That’s completely fine if you want to be vanilla, but by doing so, you may be putting massive gains off the table.

Wall Street is coalescing into specific sectors more, and this is a long-term trend you can take advantage of. You can pick ETFs that will benefit from megatrends the most over the coming years to boost your gains. This doesn’t mean you must pick out a narrow AI-focused ETF with a dozen or so holdings. Thousands of ETFs are in the market today, and hundreds have outperformed the SPY for years while having solid diversification. And they are from reputable issuers.

The following two have the firepower to continue outperforming the SPY and are worth looking into:

Industrial Select Sector SPDR Fund (XLI)

Industrial Select Sector SPDR Fund (NYSEARCA:XLI) is a passively managed exchange-traded fund. It tracks the performance of the Industrial Select Sector Index. It gives you exposure to industrial companies across various subsectors.

XLI has trailed the S&P 500 historically, but the coming years will be pivotal for this ETF. The last two decades saw the U.S. being stripped of a major portion of its manufacturing capacity, with many industries moving offshore.

China dominates manufacturing today, but the pendulum may swing the other way. Re-industrialization and onshoring were expedited during the Biden era, and could be supercharged further by tariffs in the Trump era. This is already having an impact on XLI’s gains.

XLI has outperformed the SPY this year, up 16.75% year-to-date, against the SPY’s 14.8% gain. I see it outperforming the SPY in the coming years due to tariffs bringing more manufacturing and industry to the U.S.

And even if that does not happen as expected, XLI can still match or slightly lag the SPY.

XLI comes with a 1.37% dividend yield and a 0.08% expense ratio, or $8 per $10,000. SPY gets you a 1.08% yield and charges you $1 more per $10,000.

iShares Russell 1000 Growth (IWF)

iShares Russell 1000 Growth (NYSEARCA:IWF) tracks the Russell 1000 Growth Index and gives you exposure to large- and mid-capitalization stocks in the U.S. that have growth characteristics.

The Russell 1000 itself contains exposure to 93% of the total investable U.S. equity market by market cap. This ETF invests in the growth stocks from this index, and has been sturdy enough over the long run to outperform the S&P 500 greatly. Drawdowns here are milder than the QQQ but slightly worse than the S&P 500.

IWF holds Nvidia (NASDAQ:NVDA) with a 12.9% weight, followed by Microsoft (NASDAQ:MSFT) at 11.67%, Apple (NASDAQ:AAPL) at 11.16%, Broadcom (NASDAQ:AVGO) at 4.69%, and Amazon (NASDAQ:AMZN) at 4.16%.

These top 5 holdings constitute 44.58% of its holdings, a positive if you believe that tech stocks are in a multi-year protracted bullish cycle due to the AI boom. If you look at their earnings, they are rising fast and even outpacing the stock in many cases.

Tech-heavy indexes like the Nasdaq-100 are nowhere near Dot Com-esque valuations yet. The PE ratio has been stuck near 30-35 times earnings since August 2024. To truly reach the euphoric levels of the early 2000s, the Nasdaq-100 would have to trade at 50-60 times earnings, a multiple that was the “norm” two and a half decades ago.

The market may or may not reach that level of exuberance, but more gains seem likely.

IWF comes with an expense ratio of 0.18%, or $18 per $10,000.