Much of finance is built around the concept of a “risk-free rate,” which is the theoretical return you can earn without incurring any volatility.
In practice, this standard is based on the yield of a U.S. Treasury bill, typically one with a maturity of three months or less. Right now, that means returns in the range of 4.25% to 4.5%, similar to what you’d find in a good high-yield savings account or money market fund.
That may sound decent, but rates haven’t always been this generous. If you had invested $10,000 in Treasury bills back in 2000 and held them until now, your money would have compounded at an average annual rate of just 1.9%. After 25 years, you’d have around $16,043.
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Sure, you would have avoided any investment losses. That $10,000 never dipped during the dot-com crash, the 2008 financial crisis or the COVID-19 panic of March 2020. But you would have lost something more subtle: purchasing power. By 2025, your $16,043 wouldn’t stretch nearly as far as $10,000 would have back in 2000.
Inflation is the silent threat. Over time, a rising cost of goods and services and expansionary monetary policies erode the value of money sitting in low-yielding assets. Ironically, the biggest risk of relying on the risk-free rate is that your wealth may not keep up with the very world it needs to operate in.
That doesn’t mean you need to chase the riskiest assets or resign yourself to financial nihilism. Start with your objective: income, capital growth or a mix of both. Then factor in how much volatility you’re comfortable with and how taxes might affect your returns.
From there, you’ll find no shortage of productive ways to put your capital to work beyond just sitting in cash. And the longer you stay invested, the better compounding works.
Here are seven of the best ways to invest $5,000, according to experts:
1. S&P 500 index funds.
2. Nasdaq-100 index funds.
3. Sector funds.
4. Industry funds.
5. Thematic funds.
6. Real estate investment trusts (REITs).
7. Business development companies (BDCs).
1. S&P 500 Index Funds
An index is like a recipe card that outlines which stocks to own and in what proportions. It’s a systematic, rules-based way to replace traditional stock picking. Index providers like S&P Global maintain hundreds of these benchmarks, with the most well-known being the S&P 500.
The S&P 500 is a benchmark of 500 blue-chip U.S. stocks. Candidates must meet strict requirements for market capitalization, liquidity and earnings quality. A committee also reviews constituents to ensure the list reflects the broader economy.
Most importantly, the S&P 500 can be replicated by index funds. These funds aim to passively match the index’s returns, minus a small fee.
Some charge as little as 0.015% annually, such as the Fidelity 500 Index Fund (ticker: FXAIX). That’s just $1.50 in yearly fees on a $10,000 investment. FXAIX also has no minimum investment and boasts a 10-year annualized return of 13.6%.
“In his 2014 letter to Berkshire Hathaway Inc. (BRK.A, BRK.B) shareholders, Warren Buffett said that when he passes away, the instructions for the trustee for his wife will be to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” says Robert Johnson, professor of finance at Creighton University Heider College of Business. “If that idea is good enough for Mr. Buffett, it is good enough for the vast majority of investors.”
2. Nasdaq-100 Index Funds
The S&P 500 isn’t the only benchmark for U.S. stock performance. Many investors also track the Nasdaq-100, a competing index that includes the 100 largest non-financial stocks listed on the Nasdaq exchange.
This benchmark features a narrower range of holdings and a significant tilt toward the technology sector. Its top 10 holdings currently include all members of the so-called Magnificent Seven: Microsoft Corp. (MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Alphabet Inc. (GOOG, GOOGL), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Tesla Inc. (TSLA).
Like the S&P 500, the Nasdaq-100 can be replicated by index funds. But instead of mutual funds, most investors access it through exchange-traded funds (ETFs). ETFs trade on stock exchanges like regular stocks and offer more intraday flexibility, while mutual funds price once per day after the market closes.
The flagship ETF for the Nasdaq-100 is the Invesco QQQ Trust (QQQ). “QQQ has provided exposure to innovative, technologically focused companies for nearly 25 years,” says Paul Schroeder, QQQ equity product strategist at Invesco. “It is the second-most-traded ETF and fifth-largest ETF in the world.”
That growth tilt has paid off. Over the past decade, QQQ delivered a cumulative return of 456.5%, compared to 259.4% for the S&P 500. Its heavy concentration in high-growth tech names helped it pull ahead.
3. Sector Funds
Sitting somewhere between broad market indices like the S&P 500 and individual stocks are sector ETFs. These funds offer concentrated, pure-play exposure to one of the 11 official stock market sectors: communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate and utilities.
“Using a sector ETF as a satellite for your core investments may enable you to capitalize on trends and opportunities within a particular sector that you believe could outperform the broader market,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “Sector selection involves more work and input on your part but allows you to tailor your investments to align with your expectations for specific industries.”
These funds are especially useful for more tactical investors, since individual sectors tend to respond differently to macroeconomic shifts. For example, during a recession, consumer staples and utilities often outperform due to their defensive nature. But in a strong economy, more cyclical consumer discretionary and technology stocks tend to lead.
Most major asset managers offer sector-specific ETFs, with the most popular lineups coming from Vanguard and State Street. These fund families offer competing ETFs covering all 11 sectors with an average expense ratio of about 0.09%.
4. Industry Funds
Asset managers and index providers have segmented the market even further beyond the 11 official sectors. At the next level down are industry funds. Think of these as subsectors that allow investors to explore more targeted investment themes.
For example, someone bullish on artificial intelligence (AI) might prefer an industry ETF like the VanEck Semiconductor ETF (SMH) over a broader technology sector fund. That’s because SMH exclusively focuses on chipmakers, which are critical to powering AI applications, rather than including software or IT service companies.
Similarly, an investor concerned about the risk of global conflict might prefer the Invesco Aerospace & Defense ETF (PPA) to gain exposure to defense contractors, without mixing in unrelated industrial sector stocks from areas like manufacturing or logistics.
State Street is once again a go-to provider for these niche ETFs. Its industry lineup covers a wide spectrum, from pharmaceuticals and biotech to regional banking and insurance. Most of these ETFs charge a flat 0.35% expense ratio and use an equal weighting methodology to reduce the impact of any single large-cap company.
[Read: 6 of the Best AI ETFs to Buy for 2025]
5. Thematic Funds
Some investment themes can’t be captured by targeting a single sector. Take infrastructure, for example. Companies in this space range from oil and gas pipelines to electric and water utilities, railroads, toll roads, engineering firms, and airport operators.
The problem is there’s no formal “infrastructure” sector or industry classification. These companies fall across sectors like energy, industrials and utilities. While you could piece together infrastructure exposure using a combination of sector or industry ETFs, this often results in holding non-pure-play names that only tangentially support the theme.
That’s where thematic funds can help. “Thematic ETFs invest in companies that are aligned with specific trends,” says Pedro Palandrani, senior vice president and head of product research and development at Global X ETFs. “These trends are often long-term in nature, which means that thematic ETFs can offer investors exposure to potential growth opportunities.”
A leading option is the Global X U.S. Infrastructure Development ETF (PAVE). It charges a 0.47% expense ratio and holds a blend of construction firms, railroads and utilities that support U.S. infrastructure expansion and maintenance.
With over $9.3 billion in assets and a five-star Morningstar rating, it’s one of Global X’s most popular ETFs, having historically outperformed many peers on a risk-adjusted basis.
“Thematic strategies have gained popularity, as they allow investors to capitalize on transformational trends and emerging investment opportunities by focusing on specific themes and investing through an ETF wrapper,” Palandrani says.
6. Real Estate Investment Trusts (REITs)
A $5,000 budget won’t get you a rental property, but you’re not locked out of real estate cash flows thanks to a special type of stock called REITs.
These companies are legally required to pay out at least 90% of their taxable income to shareholders, which leads to higher-than-average dividend yields compared to the broader stock market. You can invest in REITs through mutual funds and ETFs, but there’s also plenty of room to tailor your portfolio.
REITs exist across many corners of the economy. You can find ones focused on hotels, casinos, telecom towers, health care facilities and even the data centers powering AI models.
Want to bet on e-commerce growth? An industrial REIT like Prologis Inc. (PLD), which owns and leases out distribution centers and warehouses, may appeal. Prefer something steadier? Public Storage (PSA) is the biggest self-storage REIT and profits from counter-cyclical demand during recessions.
Just be aware that the tax side can get a bit more complicated and less efficient. Most REIT dividends are taxed as ordinary income of up to 37%. However, you do get a 20% deduction on qualified REIT dividends, which usually brings the top effective rate down to about 29.6%, according to Nareit.
7. Business Development Companies (BDCs)
Investing in private equity or credit funds may not be possible with a $5,000, where the price of entrance can often be a net worth of over $1 million and minimum investments well into the six figures.
BDCs offer a way for everyday investors to access a similar strategy. Created in the 1980s, BDCs are flow-through entities like REITs, designed to help smaller private companies get flexible financing for growth. Think of BDCs as public versions of private equity and private credit shops.
Most focus on lending to middle-market companies, which are typically firms with $10 million to $1 billion in annual revenue. These loans are usually secured or senior debt, meaning they have first claim on a borrower’s assets. Some BDCs also take equity-like positions through preferred shares or warrants to enhance their returns.
One standout is Main Street Capital Corp. (MAIN), one of the few internally managed BDCs. That means the management team is in-house and is better aligned with shareholder interests compared to externally managed peers. MAIN currently pays a 4.5% yield through a combination of steady monthly dividends and occasional special distributions.
Before buying any BDC, check whether its market price trades at a premium or discount to its net asset value, or NAV. NAV represents the value of the underlying assets minus liabilities.
A premium means investors are paying more than the NAV per share, often a sign of confidence in management and performance. MAIN, for instance, trades at 2.1 times NAV due to its strong reputation and historical outperformance.
On the other hand, persistent, steep discounts to NAV can reflect investor concerns about asset quality or sustainability. Comparing a BDC’s current premium or discount to its historical levels is a good way to gauge relative value.
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7 of the Best Ways to Invest $5,000 originally appeared on usnews.com
Update 07/30/25: This story was previously published at an earlier date and has been updated with new information.
