For some investors, picking individual stocks may be the right choice. But most lay investors would benefit more, from a total return on capital standpoint, from owning a small handful of exchange-traded funds (ETFs). ETFs provide instant diversification, a tax/cost-efficient structure, and much less risk than individual stocks. They can also be incorporated into an options strategy, centering around either hedging or passive income generation, in the exact same manner as individual stocks. The one drawback is that ETFs seldom rank highly on the annual list of top-performing equities.

Nonetheless, ETFs can be potent capital appreciation vehicles in their own right. Thanks to their shareholder-friendly policies and rock-bottom expense ratios, a fair number of Vanguard ETFs frequently beat the broader market on an annualized basis. One example, the Vanguard Growth Index Fund (VUG 1.82%), has quietly outperformed the red-hot Nasdaq Composite Index through the first 11 and a half months of 2023 (see chart below). Here is a brief overview of why this top-performing Vanguard ETF may still be a smart buy right now.

VUG Total Return Level Chart

VUG Total Return Level data by YCharts

3 simple, yet powerful, reasons to own this ETF

With nearly 9,000 ETFs in existence, investors certainly aren't lacking choices in this area of the market. As history has unequivocally shown, however, the Vanguard family of ETFs is hard to beat in terms of its ultra-low carrying costs and superb performance.

A finger drawing an upward trending curve.

Image source: Getty Images.

The Vanguard Growth Index Fund, or the VUG for short, is a prime example. Over the past 10 years, the VUG has delivered compound annual returns of 12.89% over the prior 10 years. At that extraordinary rate, this passively managed ETF would transform an initial investment of $100,000 into a million-dollar bankroll in about 20 years.

The VUG's impressive past performance isn't the only reason to consider buying it. Here are three more:

  1. The VUG invests in some of the most innovative and profitable large-cap companies in the world. These companies have had an average earnings growth rate of 23.3% over the past five years, which is remarkable for their size and scale. By owning the VUG, you can enjoy the stability and security of blue chip stocks, as well as their exceptional growth potential.
  2. In keeping with this theme, the VUG's top 10 largest holdings are all high-quality companies known for their exceptional earnings power, revenue growth, and fortress-level balance sheets. Most of these companies also have significant exposure to the artificial intelligence (AI) revolution, which has the potential to supercharge their earnings and revenue growth in the years ahead. The VUG, in short, provides a simple way to benefit from the AI tailwind.
  3. Perhaps best of all, the VUG's expense ratio of 0.04% is almost 96% lower than the industry average for similar tech-heavy, growth-oriented ETFs.

Key takeaway

Since its launch on Jan. 26, 2004, the VUG has consistently been one of the top-performing funds within its peer group. Looking ahead, the disruptive nature of AI ought to be a boon for many of the fund's biggest holdings over the balance of the decade. This all-important tailwind, combined with the already enormous earnings power of its blue chip holdings, should keep the VUG at the top of this list in both the near and long terms. Consequently, this low-cost Vanguard ETF screens as a strong buy for any investor on the hunt for above-average capital appreciation opportunities.