The S&P 500 is an index of 500 of the highest quality companies listed on U.S. stock exchanges. It has strict eligibility criteria. Companies must have a market capitalization of at least $18 billion and must also generate positive earnings. Even then, eligibility is at the discretion of the Index Committee.
The S&P 500 is weighted by market capitalization, meaning that the largest companies in the index have a greater impact on performance than the smallest. That’s why the technology sector — which includes billion-dollar companies like Nvidia, AppleAnd Microsoft — currently has a weighting of 31.4%, making it the largest share in the index.
But then there is the S&P 500 Growth index, which includes only 231 of the S&P 500’s best performers and ignores the rest. The Growth Index has beaten the S&P 500 by a wide margin over the long term for that reason, and that trend is likely to continue because of its composition.
The Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) directly tracks the performance of the Growth Index by holding the same stocks and maintaining similar weightings. With 2025 just around the corner, here’s why I think this ETF is a great bet to beat the S&P 500 again.
Why the S&P 500 Growth Index Tends to Outperform the S&P 500
The Growth Index selects stocks from the S&P 500 based on factors such as their momentum and the revenue growth of the underlying companies. Since technology stocks often lead the rest of the market on both fronts, it’s no surprise that the sector makes up a whopping 50.3% of the Growth Index’s weighting.
The five largest holdings in the Vanguard S&P 500 Growth index (and ETF) are in the tech sector. The table below shows their weightings relative to their weightings in the regular S&P 500:
|
Stock |
Vanguard S&P Growth ETF Weighting |
S&P 500 weighting |
|---|---|---|
|
1. Apple |
12.40% |
6.97% |
|
2. Microsoft |
11.65% |
6.54% |
|
3. Nvidia |
11.03% |
6.20% |
|
4. Meta platforms |
4.48% |
2.41% |
|
5. Amazon |
4.14% |
3.45% |
Data source: Vanguard. Portfolio weightings are accurate as of August 31, 2024 and are subject to change.
Those five stocks have generated an average return of 48.3% this year, so it makes sense that an ETF holding them in such high concentration would do extremely well. That’s why the Vanguard ETF is up 24.3% so far this year, handily outpacing the S&P 500’s gain of 19.1%.
All five stocks are likely to continue to boost the Vanguard ETF due to their presence in the artificial intelligence (AI) sector, which could be one of the most valuable technological revolutions in history. Goldman Sachs believes AI will add $7 trillion to the global economy over the next decade, while PwC estimates that figure at $15.7 trillion in 2030.
Apple recently unveiled its new AI software called Apple Intelligence, which brings powerful new capabilities to iPhones, iPads and Mac computers. Microsoft, on the other hand, is experiencing rapid growth in its Azure cloud segment as businesses rush to implement AI into their operations.
Nvidia is at the center of the entire AI revolution thanks to its data center graphics processing units (GPUs), which facilitate AI development. The company’s revenue grew 122% in the recent quarter, as tech giants like Microsoft, Amazon and Alphabet is investing tens of billions of dollars in building AI data centers.
The Vanguard ETF Could Beat the S&P 500 Next Year Too
The Vanguard S&P 500 Growth ETF has delivered a compound annual return of 16% since its inception in 2010, easily beating the S&P 500’s average annual return of 13.7% over the same period. That 2.3 percentage point difference would have had a big impact on investors in dollar terms because of the effects of compounding:
|
Initial investment (2010) |
Compound annual return |
Balance in 2024 |
|---|---|---|
|
$10,000 |
16% (Vanguard ETF) |
$79,875 |
|
$10,000 |
13.7% (S&P500) |
$60,345 |
Calculations by author.
We are still in the early stages of the AI ​​revolution. Oracle Chairman Larry Ellison recently said that AI spending could grow over the next 10 years, and if that’s the case, stocks like Apple, Microsoft and Nvidia are likely to continue delivering strong returns. That should help the Vanguard ETF outperform the S&P 500 next year (and beyond).
But even if AI doesn’t live up to expectations, the Growth Index will rebalance as needed, which should help it maintain its performance edge over the S&P 500. That’s why, as always, the Vanguard S&P 500 Growth ETF is a great bet for investors looking to beat the S&P 500 in the new year.
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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of 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 Alphabet, Amazon, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia and Oracle. 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 Unstoppable Vanguard ETF Will Beat the S&P 500 Again in 2025 was originally published by The Motley Fool
