The S&P 500 is in the midst of a powerful bull run. The index is up 20.8% this year, which is already more than double its average annual gain dating back to its inception in 1957. However, the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) is doing even better with a 27% year-to-date gain. This exchange-traded fund (ETF) has also beaten the S&P 500 every year, on average, for the last two decades.
The ETF directly tracks the performance of the S&P 500 Growth Index, which only holds the top performing stocks from the S&P 500 and disregards the rest. That means it assigns much higher weightings to powerhouses like Nvidia, which typically leads to much better returns. Here’s why I predict the Vanguard S&P 500 Growth ETF will beat the S&P 500 yet again in 2025.
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The S&P 500 has strict criteria for entry. Companies must have a market capitalization of at least $18 billion, and they also need to be profitable on a trailing 12-month basis. Even then, entry is at the discretion of a special committee that rebalances the index once every quarter.
But the S&P 500 Growth Index has even narrower criteria. It analyzes the sales growth of all 500 companies in the S&P 500, in addition to the momentum in their stock prices, and it only holds the top 233 (as of this writing) names, while ignoring the rest.
Both the S&P 500 and the S&P 500 Growth Index are weighted by market capitalization, which means their largest holdings have a greater influence over their performance than the smallest. Since the information technology sector is home to the world’s three largest companies — Nvidia, Apple, and Microsoft — it tends to dominate both indexes.
The information technology sector has a 31.7% weighting in the S&P 500, and a whopping 49.8% weighting in the S&P 500 Growth Index (and the Vanguard S&P 500 Growth ETF).
The table below displays the top five holdings in the Vanguard S&P 500 Growth ETF, and their individual weightings compared to the S&P 500 index.
|
Stock |
Growth ETF Weighting |
S&P 500 Weighting |
|---|---|---|
|
1. Apple |
12.77% |
7.25% |
|
2. Microsoft |
11.53% |
6.55% |
|
3. Nvidia |
10.77% |
6.11% |
|
4. Amazon |
6.28% |
3.56% |
|
5. Meta Platforms |
4.51% |
2.56% |
Data source: Vanguard. Portfolio weightings are accurate as of Sept. 30, 2024, and are subject to change.
The above five stocks have delivered an average return of 57.7% in 2024. Since the Vanguard S&P 500 Growth ETF assigns them a much higher weighting than does the S&P 500, that explains the ETF’s outperformance this year.
Artificial intelligence (AI) has become a key growth driver for each of those five companies. The incredible gains in Nvidia stock over the last two years have come on the back of surging demand for its graphics processing units (GPUs) for the data center, which are the most powerful in the industry for developing AI models. The company will start shipping its new Blackwell GPUs at the end of this year, and CEO Jensen Huang says demand is “insane.”
Apple recently launched its Apple Intelligence software for its latest iPhones, iPads, and MacBooks. It designed this software in partnership with OpenAI. It allows users to instantly summarize and generate text content for messages and emails, and it even learns to prioritize certain notifications. Apple Intelligence is also transforming the Siri voice assistant by giving it the knowledge and capabilities of OpenAI’s ChatGPT.
Microsoft and Amazon have each developed their own AI-powered virtual assistants. Plus, as the world’s top two providers of cloud services, they have also become the go-to destinations for developers seeking access to AI data centers, and the latest large language models (LLMs) to help them build AI software.
The Vanguard S&P 500 Growth ETF has generated a compound annual return of 16% since its inception in 2010. That comfortably outpaces the 13.7% average annual gain in the S&P 500 over the same period. That 2.3-percentage-point differential makes a big difference over the long term thanks to the magic of compounding.
|
Starting Balance (2010) |
Compound Annual Return |
Balance in 2024 |
|---|---|---|
|
$50,000 |
16% (Vanguard S&P 500 Growth ETF) |
$399,375 |
|
$50,000 |
13.7% (S&P 500) |
$301,728 |
Calculations by author.
The S&P 500 Growth Index and the Vanguard S&P 500 Growth ETF rebalance every quarter by replacing their underperforming stocks. That ensures that the Growth Index will almost always outperform the regular S&P 500, because it doesn’t have to hold the stocks that aren’t delivering strong returns.
The only time the S&P 500 might do better is when dividend stocks perform better than growth stocks, but that is rare. The chart below overlays the Vanguard S&P 500 Growth ETF with the S&P 500 High Dividend Index, and it shows that growth stocks have only lagged dividend stocks in one year out of the last 10.
That’s why I think the Vanguard S&P 500 Growth ETF has a great chance to outperform the S&P 500 yet again in 2025, especially as trends like AI gather momentum.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Prediction: This Relentless Vanguard ETF Will Beat the S&P 500 Again in 2025 was originally published by The Motley Fool
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