The S&P500 (SNPINDEX: ^GSPC) is having a very strong year, with a gain of 27.3% year to date. That’s more than twice the average annual return going back to 1957.
However, the Vanguard Growth ETF (NYSEMKT: VUG) performing even better, with a gain of 30.9% since the beginning of the year. That’s because technology stocks are leading the S&P higher in 2024 thanks to trends like artificial intelligence (AI), and this Vanguard exchange-traded fund (ETF) gives them a much higher weighting.
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The Vanguard ETF has a strong track record of outperforming the S&P 500, beating the index every year (on average) since its inception in 2004.
The technology sector will likely continue to lead the broader market higher. That’s why I predict the Vanguard ETF will beat the S&P 500 again in 2025.
The Vanguard ETF invests exclusively in American large-cap growth companies. It owns 182 stocks from 12 different sectors, but the technology sector represents by far the largest part of its portfolio, with a 58% weighting.
By comparison, the S&P 500 is home to 500 different companies, and the technology sector accounts for 31.7% of its portfolio. That means the Vanguard ETF is much more concentrated, which can lead to additional risk during periods when technology stocks are underperforming.
The top three holdings in the Vanguard ETF are in the technology sector and alone account for over a third of the value of the entire portfolio. The top five holding companies are rounded out with Amazon (which is in the consumer durables sector) and Metaplatforms (in the communications services sector). Their individual weightings relative to the S&P 500 are below:
|
Stock |
Vanguard ETF Weighting |
S&P 500 weighting |
|---|---|---|
|
1. Apple |
11.71% |
7.11% |
|
2. Nvidia |
10.94% |
6.76% |
|
3. Microsoft |
10.80% |
6.26% |
|
4. Amazon |
6.00% |
3.61% |
|
5. Metaplatforms |
4.70% |
2.57% |
Data source: Vanguard. Portfolio weights are accurate as of October 31, 2024 and are subject to change.
These five companies are at the forefront of the AI revolution, dominating both the hardware and software sides of this emerging industry. Their stocks have delivered an average return of nearly 61% through 2024, led by Nvidiawhich is up 173% thanks to incredible demand for its AI data center chips:
Because the Vanguard ETF assigns a higher weighting to these five stocks than the S&P 500, it’s no surprise that it has delivered better returns in 2024.
Beyond its top five holdings, the ETF has a number of other strong performing stocks in the AI space, including Tesla, AlphabetAnd Broadcom.
But it’s not just about technology. Stocks like Eli Lilly, Visa, Costco WholesaleAnd McDonald’s are among the top 20 investments in the ETF.
The Vanguard ETF has delivered a compound annual return of 11.4% since its inception in 2004, which is better than the S&P 500’s average annual return of 10.1% over the same period.
This outperformance has accelerated over the past decade, with the Vanguard ETF delivering a compound annual return of 15.2%, compared to an average annual gain of 13.2% in the S&P.
If AI stocks continue to lead the market higher in 2025, the Vanguard ETF should have no problem outperforming the S&P 500 again since they represent such a large portion of its portfolio. However, a market correction could shake things up as investors shy away from momentum-driven stocks and flock to safer dividend payers instead.
The Vanguard Growth ETF consistently outperforms the Vanguard Dividend Valuation ETF (NYSEMKT: VIG). But looking at the chart below, the Growth ETF suffers much steeper declines during turbulent periods, implying that growth stocks could easily fall. underperform dividend stocks during a single year of broader market weakness:
The S&P 500 isn’t cheap right now. The price-earnings ratio (P/E) of 24.7 is about 36% higher than the long-term average of 18.1 from the 1950s. Growth stocks are responsible for most of that premium; For example, each of the Vanguard ETF’s five largest holdings trades at a higher price-to-earnings ratio than the S&P.
As a result, I cannot rule out the possibility of a correction sometime in 2025. However, as long as the US economy remains strong, this will most likely be a short-lived buying opportunity, with growth stocks bouncing back to take the lead. the market higher again.
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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. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Microsoft, Nvidia, Tesla, Vanguard Dividend Appreciation ETF, Vanguard Index Funds-Vanguard Growth ETF, and Visa. 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
