The S&P500 (SNPINDEX: ^GSPC) The index is in a raging bull market and has returned 21.9% this year – more than twice its 1957 average annual return.
However, the Vanguard Growth ETF (NYSEMKT: VUG) is doing even better with a gain of 23.9% since the beginning of the year. This exchange-traded fund (ETF) has also outperformed the S&P 500 on average every year for the past two decades.
That’s because the Vanguard ETF owns some of the best-performing stocks in the S&P 500, such as Nvidia — with a much higher weighting, which increases the total return.
The tech sector will likely continue to drive the broader stock market higher in 2025 thanks to trends like artificial intelligence (AI), so here’s why I predict the Vanguard ETF will beat the S&P 500 again next year.
The Vanguard ETF invests exclusively in large-cap US companies. It owns 183 stocks from 12 different sectors of the economy, but a whopping 57.7% of the value of its portfolio is taken up by the technology sector.
That means the ETF isn’t as diversified as the S&P 500, which consists of 500 different companies and a technology sector weighting of just 31.7%.
Each of the three largest holdings in the Vanguard ETF are technology stocks, which alone represent nearly a third of the portfolio’s total value. Amazon (which is in the consumer durables sector) and Metaplatforms (which is in the communications services sector) round out the top five ETF holdings. The table below shows their individual weightings relative to the S&P 500:
|
Stock |
Portfolio weighting of Vanguard ETF |
S&P 500 weighting |
|---|---|---|
|
1. Apple |
12.05% |
7.25% |
|
2. Microsoft |
11.41% |
6.55% |
|
3. Nvidia |
9.99% |
6.11% |
|
4. Amazon |
5.99% |
3.56% |
|
5. Metaplatforms |
4.73% |
2.56% |
Data source: Vanguard. Portfolio weights are accurate as of September 30, 2024 and are subject to change.
These five stocks have returned an average of 60.1% so far in 2024, and since the Vanguard ETF has them at a much higher weighting than the S&P 500, that explains the outperformance this year:
All five companies mentioned above are at the forefront of the AI revolution, and considering this emerging industry could add anywhere from $7 trillion to $200 trillion to the global economy over the next decade (depending on which Wall Street forecast you trust) , they would remain a crucial source of returns for the S&P 500 and the Vanguard ETF.
For example, Nvidia was valued at $360 billion in early 2023. Less than two years later, its market capitalization is now $3.3 trillion, making it the second largest company in the world. It’s delivering the revenue and profit growth to support this, thanks to rising demand for its data center chips, the preferred choice among AI software developers.
Outside of the top five holdings, the Vanguard ETF owns several other popular AI stocks, including Alphabet, Tesla, Broadcom, Advanced micro devicesand more.
As I noted at the top, the Vanguard ETF has a strong track record against the S&P 500. Since its inception in 2004, it has delivered a compound annual return of 11.5%, which is better than the average annual return of 10.1% in the S&P 500. during the same period.
But that outperformance has recently increased. The ETF has generated a compound annual return of 15.5% over the past decade, compared to 13.2% for the S&P. That 2.3 point difference may not sound like much, but it can have a big impact in dollar terms in the long run, thanks to the effects of compound interest:
|
Opening balance (2014) |
Compound annual return |
Balance in 2024 |
|---|---|---|
|
$50,000 |
15.5% (Vanguard ETF) |
$211,246 |
|
$50,000 |
13.2% (S&P 500) |
$172,756 |
Calculations by author.
If AI stocks like Nvidia continue to lead the S&P 500 higher in 2025, the Vanguard ETF should outperform simply because they represent a much larger percentage of its portfolio.
Although the ETF has on average beaten the S&P 500 over the long term, that doesn’t mean the ETF can’t underperform in a given year. In a scenario where AI fails to live up to the hype – or if companies like Nvidia, Microsoft and Apple generate weaker earnings than Wall Street expects – the Vanguard ETF could experience a period of underperformance.
Therefore, while I predict the ETF will do very well in 2025, investors should own this ETF as part of a balanced portfolio to offset the high exposure to AI stocks.
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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, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Prediction: This Unstoppable Vanguard ETF Will Beat the S&P 500 Again in 2025 Originally published by The Motley Fool
