The S&P 500 has long been considered the benchmark for the stock market. It includes about 500 of the largest companies traded on a major U.S. exchange. It is a market-capitalization, weighting-based index, meaning that the greater the value of the company, the greater the percentage of the index that stock represents.
Many investment professionals strive to outperform the S&P 500, but that has proven to be no easy feat. The index has delivered strong results over the years, with an average annual return of 13.2% over the past 10 years through the end of July. More than 87% of U.S. large-cap funds have underperformed the S&P 500 over the past decade, according to S&P.
However, one exchange-traded fund (ETF) has consistently outperformed the S&P 500 over the past decade, and I think that outperformance will continue into the next decade. That ETF is the Vanguard Growth ETF (NYSEMKT: VUG).
An ETF that consistently outperforms the S&P 500
The Vanguard Growth ETF is similar to ETFs that track the S&P 500, except it tracks the CRSP US Large Cap Growth Index, which is essentially the growth side of the S&P. The S&P 500 and the Vanguard Growth ETF share many of the same top positions, but the Vanguard ETF generally holds them in a much higher percentage.
For example, at the end of the second quarter, Apple was the largest holding in both, but the iPhone maker had a 12.9% stake in the Vanguard Growth ETF, compared to 6.9% in the Vanguard S&P 500 ETFthat tracks the S&P 500.
As a result, the Vanguard Growth ETF is much more heavily weighted toward technology and consumer discretionary stocks than the S&P 500. Nearly 60% of the portfolio’s composition is in technology stocks, with another nearly 17% in consumer discretionary. By comparison, the largest sectors of the Vanguard S&P 500 ETF are technology at over 31%, followed by financials at 13%.
The Vanguard Growth ETF’s heavier weighting toward tech stocks has helped it outperform in recent years, with an annual return of 15.3% over the past decade through the end of July. While that may not be much different from the performance of the S&P 500, the additional return on a $100,000 investment in the Vanguard Growth ETF versus the Vanguard S&P 500 ETF would be $73,580 over 10 years.
Why the Vanguard Growth ETF Should Continue to Outperform
While past performance is no guarantee of future performance, there is reason to believe the Vanguard Growth ETF will outperform the S&P 500 over the next decade.
The fund is much more heavily weighted toward tech stocks, which I think gives it a long-term advantage. These companies tend to grow into the largest companies in the world. There’s a reason nine of the largest components of the S&P 500 are in tech-related companies, including Amazon And TeslaIn reality, Berkshire Hathaway is the only company without growth in the S&P top 10.
Given that growth companies tend to grow into the world’s largest companies, there is reason to believe that these companies will outperform value companies in the long run. Meanwhile, we are currently in the early stages of what appears to be a major technological shift with artificial intelligence (AI). As AI and technology continue to change the world, investing in this sector seems like a good long-term investment.
With technology company valuations now more than reasonable, I predict the Vanguard Growth ETF will outperform the S&P over the next decade.
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Prediction: This ETF Will Outperform the S&P 500 Over the Next Decade was originally published by The Motley Fool
