Buying one S&P500 index fund is an excellent way to achieve diversification and bet on the growth of the American economy. However, some investors may prefer to combine individual stocks and exchange-traded funds (ETFs) to invest in companies that they believe can help them achieve their investment objectives – whether that be fueling their passive income stream is, betting on a particular theme or sector or trying to outperform the S&P 500.
Vanguard offers more than 85 low-cost ETFs for stocks, fixed income, and blends. The best performing of these ETFs to date has been the Forefront S&P 500 Growth ETF (NYSEMKT: VOOG) — which is up 29.2% so far in 2024 versus a 21.9% gain in the S&P 500. Here’s why the ETF could beat the market again in 2025, and why it’s worth it to buy and hold for the long term.
Betting on the biggest and best growth stocks
Growth investing prioritizes the potential for future earnings and cash flows, while value investing focuses on what a company produces today.
With 231 holdings, the Vanguard S&P 500 Growth ETF essentially splits the S&P 500 in half and focuses on the companies with the highest growth rates, regardless of valuation. The strategy works well when companies achieve profit growth, but can backfire when actual results do not meet expectations.
The Vanguard S&P 500 Growth ETF has a whopping 59.7% weighting in the top 10 names — Apple, Microsoft, Nvidia, Alphabet, Metaplatforms, Amazon, Eli Lilly, Broadcom, TeslaAnd Netflix. Meanwhile, the Vanguard S&P 500 ETF only has a 34.3% weighting in those same 10 stocks. Considering that many of these companies have been market-beating stocks in 2024, it makes sense that the Vanguard S&P 500 Growth ETF would outperform the S&P 500.
To continue to beat the market, these companies must prove they can grow profits faster than the market average, which justifies higher valuations.
Understanding growth stock valuations
The following chart shows the future earnings multiplications for these ten companies, based on analyst estimates for the next twelve months. With the exception of Alphabet, none of these stocks look particularly cheap. But context is crucial.
Take metaplatforms for example. Meta spends a lot of money on research and development, from buying artificial intelligence (AI)-powered Nvidia chips to experimenting with virtual reality, the metaverse, and more. Meta could easily not make these investments and grow its short-term profits, which would make the stock look dirt cheap.
The same could be said for Nvidia, which could have slowed its pace of innovation to increase its profitability. Instead, it chose to invest in a new chip that could deliver unparalleled efficiency and cost savings for its customers.
Amazon is known for focusing more on revenue growth than profit growth. It could easily be a low-cost, high-margin company if it didn’t reinvest so much of its cash flow into the business.
One reason these companies command expensive valuations is that investors have driven up their stock prices. But another, more important factor is that these companies are not focused on generating as much profit as possible right now, but rather on charting a path to future growth that often comes at the expense of short-term results.
For this strategy to work well over time, companies must allocate capital to projects that generate returns on their investments. If a company starts spending money on bad ideas, it will quickly fall apart.
A reasonably balanced growth ETF
What sets the Vanguard S&P 500 Growth ETF apart from other growth funds is that it includes many traditional “value stocks,” such as Procter & Gamble, Merck, Coca-cola, PepsiCoAnd McDonald’sas well as faster-growing companies in non-technology-focused industries, such as United Health And Costco Wholesale. These companies don’t have nearly the growth potential of an innovative tech stock like Nvidia, but they do have track records for steady earnings growth over time. Investors are willing to pay a higher multiple for a stock like P&G compared to its peers because P&G is a well-run, high-margin company that does a masterful job developing its top brands.
While roughly 60% of the Vanguard S&P 500 Growth ETF is in the top 10 investments, the remaining 40% of the fund is fairly evenly distributed across companies from different sectors. Overall, the Vanguard S&P 500 Growth ETF has a price-to-earnings (P/E) ratio of 32.9, compared to 29.1 for the Vanguard S&P 500 ETF. So it’s not like it’s that much more expensive, especially compared to ultra-growth-oriented ETFs like the Vanguard Mega Cap Growth ETFwhich has fewer stakes and higher weightings in a handful of companies.
Think long term with the Vanguard S&P 500 Growth ETF
With an expense ratio of just 0.1%, the Vanguard S&P 500 Growth ETF gives investors a low-cost way to target hundreds of top growth stocks without paying high fees.
Focusing on high-quality companies that grow their earnings is a recipe for outperforming other funds or indexes with fewer quality names. However, it is important to understand that the stock market can do almost anything in the short term.
If near-term results disappoint or investor sentiment turns negative, companies whose valuations are based on future growth are likely to sell more than companies that are valued fairly based on what they earn today.
That’s why it’s important to approach the Vanguard S&P 500 Growth ETF with a long-term mindset and an understanding that even the best companies experience brutal selloffs.
Should You Invest $1,000 in Vanguard Admiral Funds – Vanguard S&P 500 Growth ETF Now?
Consider the following before buying shares in Vanguard Admiral Funds – Vanguard S&P 500 Growth ETF:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Vanguard Admiral Funds – Vanguard S&P 500 Growth ETF wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $845,679!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns October 14, 2024
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. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Merck, Meta Platforms, Microsoft, Netflix, Nvidia, Tesla and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and UnitedHealth Group 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: Vanguard’s Best Performing ETF in 2024 Will Also Outperform the S&P 500 in 2025 Originally published by The Motley Fool
