3 Red-Hot ETFs That Show No Signs of Cooling Off | The Motley Fool (2024)

Exchange-traded funds (ETFs) have become increasingly sophisticated and less expensive. There's nothing quite like investing in an individual company's stock and watching it grow over time, but ETFs have value even for seasoned investors.

By providing diversification in a theme or sector, an ETF is one of the simplest ways to dip your toes into something new or access foundational holdings.

Here's why these three Motley Fool contributors believe the Vanguard Growth ETF (VUG -0.55%), the VanEck Semiconductor ETF (SMH -1.78%), and the Global X U.S. Infrastructure Development ETF (PAVE -0.70%) are three top ETFs.

Find pockets of growth no matter where they hide

Daniel Foelber (Vanguard Growth ETF): Vanguard's premier growth fund is a beautifully simple yet effective way to invest in the broader market -- for a mere 0.04% expense ratio. The fund goes through the market's large-cap stocks and excludes whichever ones are not growth-orientated. The result is a lower yield, a more expensive valuation than the S&P 500, and a far higher concentration in the market's top growth sectors.

Over 75% of the fund is in the technology and consumer discretionary sectors. However, this concentration is preferred by many risk-tolerant investors. As long as growth stocks keep leading the market higher, I would expect the Vanguard Growth ETF to outperform the S&P 500. That's been the case so far this year, with the fund up 8.6% compared to 6.3% for the S&P 500. It's been true over the last year as well, with a 45.4% gain for the Vanguard fund and a 27.3% gain for the S&P.

Go back even further, and the fund is up 254.4% compared to 173.4% for the S&P over the last decade.

A close comparison to the Vanguard Growth ETF is the Nasdaq Composite, where many of the faster-growing new companies are listed. However, the issue with just buying a fund like the Invesco QQQ (NASDAQ: QQQ), which targets the 100 largest Nasdaq-listed companies, is that it excludes growth stocks listed on the New York Stock Exchange (NYSE).

The best example right now is drugmaker Eli Lilly -- the most valuable U.S.-based healthcare company and currently the eighth-most valuable company in the S&P 500 (behind Berkshire Hathaway and ahead of Tesla).Pure-play Nasdaq funds can't touch Eli Lilly because it is traded on the NYSE.

But the Vanguard Growth ETF doesn't have that restriction. Eli Lilly is the fund's seventh-largest holding at 2.5%.

The Vanguard Growth ETF is an inexpensive and simple way to capture the growth that leads bull markets without the limitations of only investing in companies listed on the Nasdaq exchange.

AI enthusiasm continues to power this semiconductor ETF higher

Scott Levine (VanEck Semiconductor ETF): Artificial intelligence (AI) is one of the hottest investing trends right now. While there are ETFs that specifically cater to AI-minded investors, one opportunity that might not be as obvious is the VanEck Semiconductor ETF.

In addition to AI-related stocks, like Nvidia, the ETF provides exposure to a variety of other semiconductor stocks. Over the past year, the VanEck ETF has skyrocketed more than 73% while the S&P 500 has risen 29%. With the demand for AI solutions (as well as semiconductors) expected to remain high for the foreseeable future, this ETF (with a relatively low net expense ratio of 0.35%) offers a great opportunity at the moment.

Because both generative AI and machine learning in general require significant computing power, semiconductor stocks represent an excellent way to gain exposure to the rapidly growing industry. The largest position among the VanEck Semiconductor ETF's 26 holdings is Nvidia, at 23% of the fund's assets as of Jan. 31.

Nvidia's graphics processing units (GPUs) are essential to the success of Open AI's ChatGPT program. And besides that chipmaker, the ETF includes other leading AI-related stocks like Broadcom and Intel, which are both among the ETF's 10 largest holdings.

The VanEck ETF also includes significant exposure to Taiwan Semiconductor Manufacturing, the second-largest position at 9.25% of the fund. With more than 500 customers, Taiwan Semiconductor supplies chips that are used in various applications, like automobiles, smartphones, and consumer electronics.

The VanEck Semiconductor ETF makes distributions annually. It currently has a 12-month yield of 0.51%, which helps to cover the fund's management fee.

This infrastructure ETF is focused on investing in the U.S.

Lee Samaha (Global X U.S. Infrastructure Development ETF): This ETF is up almost 30% over the last year, and its 66% increase over the last three years has outperformed the near 40% return for the S&P 500 over the same period.

It's an impressive performance, considering the ETF holds 99 stocks with no more than 3.2% in any one stock. It isn't easy to generate such outperformance with such a wide range of holdings, but this ETF has done it.

And that outperformance speaks to the strength of investing in U.S. infrastructure. A large part of this comes down to the signing of the $1 trillion U.S. Infrastructure Investment and Jobs Act in 2021.

That said, it's not just about one funding deal. Investing in infrastructure is an ongoing necessity to ensure that a modern economy can adapt to change and function properly.

The global supply-chain crisis highlighted the need to improve U.S. logistics infrastructure. Companies faced soaring transportation costs and an inability to source supplies -- knock-on effects of the pandemic lockdowns imposed on the economy. These stresses will only increase as growing geopolitical tensions create greater interest in locally sourced supplies.

The Global X ETF offers a cost-effective way to gain exposure to the theme, and its 0.47% expense ratio is reasonable enough. It gives investors a way to get exposure without the added complication and risk of trying to pick winners from a crowded field of individual stocks.