The S&P 500 (SNP INDEX: ^GSPC) is an index of 500 companies listed on U.S. stock exchanges. It is a prestigious achievement for any company to be admitted to the index, and only the highest quality names make the cut.
Selection is at the discretion of the Index Committee, but companies must be profitable and must also have a market capitalization of at least $18 billion. That figure rises over time because the S&P 500 is weighted by market capitalization, meaning the largest companies in the index have a greater impact on performance than the smallest.
As a result, technology has become the largest sector in the index with a weighting of 31.4%. It includes trillion-dollar giants Microsoft, AppleAnd Nvidia.
Meet the S&P 500 Growth Index
The S&P 500 Growth index includes about 231 of the best-performing stocks in the regular S&P 500 and excludes the rest. It selects those stocks based on factors such as their momentum and the revenue growth of the underlying companies.
It’s no surprise, then, that the tech sector makes up a whopping 50.2% of the growth index. Nvidia, for example, saw its revenue grow 262% year over year in the most recent quarter, and its shares are up 200% in the past 12 months alone.
But here’s the best part. The Growth Index rebalances every quarter, meaning it removes stocks that no longer meet its criteria for inclusion and replaces them with more suitable candidates. As a result, this index has typically outperformed the regular S&P 500 over the long term.
The Vanguard S&P 500 Growth ETF tracks the S&P 500 Growth index
The Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) is designed to track the performance of the S&P 500 Growth Index by holding the same stocks and maintaining similar weightings.
The table below shows the five largest holdings in the Vanguard ETF and how their weightings compare to the regular S&P 500:
|
Stock |
Vanguard ETF Weighting |
S&P 500 weighting |
|---|---|---|
|
1. Apple |
12.28% |
6.89% |
|
2. Microsoft |
11.93% |
6.70% |
|
3. Nvidia |
11.04% |
6.20% |
|
4. Amazon |
4.43% |
3.69% |
|
5. Meta platforms |
4.17% |
2.24% |
Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024 and are subject to change.
The Vanguard ETF returned 36.5% over the past year, easily outperforming the S&P 500, which is up 30.2%:
Two factors played a role:
-
The five stocks in the table above have returned an average of 76.7% over the past year. Because they have a much higher weighting in the Vanguard ETF relative to the S&P 500, that has contributed to the ETF’s outperformance.
-
As I mentioned earlier, the Growth Index (and by extension the Vanguard ETF) only includes the best performing stocks in the S&P 500 and excludes the laggards. This also contributed to the higher return of the ETF.
The Vanguard ETF can outperform the S&P 500 over the long term
The Vanguard ETF has delivered a compound annual return of 15.9% since its inception in 2010, outpacing the S&P 500’s average annual return of 13.7% over the same period. While that 2.2 percentage point per year difference may not sound like much, in dollar terms it adds up to a big impact thanks to the effects of compounding:
|
Opening balance (2010) |
Compound annual return |
Balance in 2024 |
|---|---|---|
|
$10,000 |
15.9% (Vanguard ETF) |
$78,916 |
|
$10,000 |
13.7% (S&P500) |
$60,345 |
Calculations by author.
If technologies like cloud computing, semiconductors, and artificial intelligence continue to propel the tech sector forward, the largest holdings in the Vanguard ETF will likely remain constant for years to come. In that scenario, I predict the ETF will continue to outperform the S&P 500.
But even if there is a shift in market leadership, the Growth Index will rebalance as needed. So if the Vanguard ETF does experience a period of underperformance relative to the S&P 500, I think it will likely be very short-lived.
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Randi Zuckerberg, former chief marketer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 Unstoppable Vanguard ETF Will Continue to Beat the S&P 500 Over the Long Run was originally published by The Motley Fool
