This Vanguard ETF has the potential to continue beating the S&P 500 over the long term, even if artificial intelligence (AI) fails to live up to the hype.
The benchmark S&P 500 has delivered a compound annual return of 10.4% since it was established in 1957 (assuming all dividends were reinvested). However, a handful of stocks within the index have already obliterated that return in 2024 on the back of their efforts in the artificial intelligence (AI) space.
Nvidia, for example, is up a whopping 162% this year alone, with Meta Platforms shares rising 42%, and Alphabet stock climbing 30%. Keep in mind that it’s only June!
Simply put, your portfolio has probably lagged the performance of the S&P 500 lately if it doesn’t have exposure to those AI giants. But that doesn’t mean you should pile into those popular names right now.
Instead, buying the Vanguard S&P 500 Growth ETF (VOOG 0.08%) can give you exposure to all of them inside a balanced portfolio of other fast-growing stocks. This ETF has routinely outperformed the S&P 500 over the short term and long term, and here’s why it’s poised to continue.
Image source: Getty Images.
The best stocks in the S&P 500, neatly packaged into one ETF
The S&P 500 is very exclusive. To be included in the index, a company needs to have a market capitalization of at least $18 billion, the sum of its earnings over the last four quarters must be positive, and at least half of its shares must be available for public trading. Therefore, it only includes high-quality stocks by default.
The Vanguard S&P 500 Growth ETF is designed to track the performance of the S&P 500 Growth Index, which refines the S&P 500 even further by featuring only 229 of its best-performing stocks. By that description alone, it’s no surprise it consistently outperforms.
Those stocks are selected based on sales growth, momentum, and the ratio of their earnings change relative to their price. Given the strong financial results and stunning returns delivered by some of the world’s largest AI stocks over the past couple of years, they occupy most of the top 10 positions in the Vanguard ETF (and the S&P 500 Growth Index):
Stock | Vanguard S&P 500 Growth ETF Weighting |
|---|---|
1. Microsoft | 12.51% |
2. Apple | 11.32% |
3. Nvidia | 10.98% |
4. Amazon | 6.54% |
5. Meta Platforms | 4.16% |
6. Alphabet Class A | 4.12% |
7. Alphabet Class C | 3.48% |
8. Eli Lilly | 2.65% |
9. Broadcom | 2.37% |
10. Tesla | 2.00% |
Data source: Vanguard. Portfolio weightings are accurate as of May 31, 2024, and are subject to change.
Those top 10 holdings account for about 60% of the total value of the Vanguard ETF, so it’s heavily concentrated in the technology sector. In fact, pharmaceutical giant Eli Lilly is the only company in the above list that isn’t catching a tailwind from the AI boom. Instead, its stock has nearly doubled over the past year based largely on the success of its weight loss drugs.
Nvidia, on the other hand, is at the center of the AI revolution. Developing advanced AI models wouldn’t be possible without its graphics processing chips (GPUs) for the data center, leading to explosive demand. Microsoft, Amazon, Meta, Alphabet, and even Tesla are some of Nvidia’s biggest customers. They’re racing to invest billions of dollars in AI infrastructure to develop applications for themselves, as well as to serve other developers.
But the Vanguard ETF also owns a healthy dose of stocks outside the AI space. This includes financial juggernauts Visa and Mastercard, and retail giants like Costco Wholesale and Home Depot. Some of its smaller positions include Caterpillar, Coca-Cola, and Chipotle Mexican Grill.
The Vanguard ETF has a spectacular track record versus the S&P 500
The Vanguard ETF is very cheap to own, sporting an expense ratio of just 0.1%, which is the portion of the fund deducted each year to cover management costs. Competing ETFs can be almost 10 times as expensive, which detracts from their long-term returns.
The Vanguard ETF has delivered a compound annual return of 15.7% since its inception in 2010. Over the same period, the S&P 500 was up 13.4% per year on average. While that doesn’t sound like a huge difference, that extra 2.3 percentage points annually can significantly boost returns in dollar terms:
Starting Balance in 2010 | Compound Annual Return | Balance In 2024 |
|---|---|---|
$10,000 | 15.7% for the Vanguard ETF | $77,031 |
$10,000 | 13.4% for the S&P 500 | $58,154 |
Calculations by author.
The disparity has widened more recently, with the Vanguard ETF soaring 31.7% over the past year compared to just 24.7% for the S&P 500. The Vanguard ETF holds larger positions (by weight) in high-flying stocks like Nvidia compared to the S&P 500, which is causing the accelerated outperformance.
But AI doesn’t have to continue driving the market for the Vanguard ETF to do well. Sure, if the technology fails to live up to the hype, many of its best-performing stocks will likely reverse course, which would trigger a temporary period of underperformance. But the ETF rebalances each quarter by kicking out the laggards in favor of the S&P 500 stocks that are working (per the mandate of the S&P 500 Growth Index).
That’s why this ETF could be a great choice for investors looking to beat the broader market, whether AI remains a dominant force or not.
Suzanne Frey, an executive at Alphabet, 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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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, Chipotle Mexican Grill, Costco Wholesale, Home Depot, Mastercard, Meta Platforms, Microsoft, Nvidia, Tesla, and Visa. The Motley Fool recommends Broadcom and recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
