The S&P 500 index has been hitting new record highs recently. This is great news as mutual funds and exchange-traded funds (ETF) that track the index are widely held by investors. Index ETFs are a great way for beginners and even more experienced investors to gain market exposure. They offer instant diversification, take little research effort, and are generally low cost.
The other great thing about ETFs that track market-cap-weighted indexes like the S&P 500 is that these funds have no emotions. They let their winners run and become a larger part of the index and their losers fall and become a smaller part. This is the exact opposite of what many investors do, which is to take profits in their winning stocks and dollar-cost average into their losers.
Investing in the S&P 500 has proven to be a great strategy leading to solid returns over the long term. However, if you are looking for even better returns, there are two market-cap-weighted index ETFs that have outperformed the S&P 500 index over the past 10 years.
Vanguard S&P 500 Growth ETF
NYSEMKT: VUG
Key Data Points
The Vanguard S&P 500 Growth ETF (VUG 0.73%) tracks the growth subset of the S&P 500 index and owns about 200 stocks. The ETF's top 10 holdings are similar to those of the S&P 500 index, except it does not hold Berkshire Hathaway.
The biggest difference, though, is that its top 10 holdings are a much larger percentage of its portfolio, making up nearly 55% of the fund. By comparison, the top 10 holdings of the S&P 500 index are less than a third of the total index's weighting. This means that the top holdings in the S&P 500 Growth ETF are playing a much bigger role in how the ETF performs.
This ETF is heavily weighted toward technology stocks, with over 56% of the ETF invested in the sector, followed by 19% in consumer discretionary stocks. Notably, a number of companies that are classified as consumer discretionary are very tech-oriented, such as Amazon and Tesla.
Over the past 10 years, the Vanguard S&P 500 Growth ETF has nicely outperformed the S&P 500, generating an average annual return of 14.6% versus 12.4% for the index.
Invesco QQQ ETF
NASDAQ: QQQ
Key Data Points
Another fund that has outperformed the the S&P 500 by an even greater percentage is the Invesco QQQ ETF (QQQ 0.45%), which tracks the Nasdaq 100 index. Its top holdings are similar to those of the Vanguard S&P 500 Growth ETF, although it doesn't include some New York Stock Exchange-listed stocks such as Eli Lilly and Visa.
The fund is also very much tech weighted, with nearly 60% of its portfolio in the sector and another nearly 18% in consumer discretionary stocks.
This ETF has been a huge winner over the past decade, producing an annual average return of 18.1%. That easily outpaces the performance of the Vanguard S&P 500 Growth ETF and the S&P 500 index. Invesco boasts that the ETF has outperformed the S&P 500 index 87% of the time over the past decade.
A $10,000 investment in the Invesco QQQ ETF 10 years ago would be worth over $55,000 as of the end of March. And the same investment 20 years ago would be worth a whopping $145,436.
Image source: Getty Images
Technology leads the way
The one big thing that both the Vanguard S&P 500 Growth ETF and the Invesco QQQ ETF have in common is that they are both more heavily weighted toward technology stocks than the S&P 500 index. And the fact is that technology is consistently changing the world, and technology companies as a result have become the biggest winners.
With the advent of artificial intelligence (AI), this trend likely won't slow down and may only continue to accelerate. That means there is a good chance that these two ETFs will also outperform the S&P 500 index over the next 10 years as well.
