The S&P 500 is an index of 500 of the highest quality companies listed on U.S. stock exchanges. It has strict entry criteria. Companies need a market capitalization of at least $18 billion, and they also need to generate positive earnings. Even then, admittance is at the discretion of the Index Committee.
The S&P 500 is weighted by market capitalization, which means the largest companies in the index have a greater influence over its performance than the smallest. That's why the technology sector -- which includes trillion-dollar giants like Nvidia, Apple, and Microsoft -- has a 31.4% weighting at the moment, making it the largest in the index.
But then there is the S&P 500 Growth index, which exclusively holds 231 of the best performers from the S&P 500 and disregards the rest. The Growth index has comfortably beaten the S&P 500 over the long term for that reason, and that trend is likely to continue because of its composition.
The Vanguard S&P 500 Growth ETF (VOOG -1.23%) directly tracks the performance of the Growth index by holding the same stocks and maintaining similar weightings. With 2025 around the corner, here's why I think this ETF is a great bet to beat the S&P 500 yet again.
Why the S&P 500 Growth index tends to outperform the S&P 500
The Growth index selects stocks from the S&P 500 based on factors like their momentum, and the sales growth of the underlying companies. Since technology stocks often lead the rest of the market on both fronts, it's no surprise the sector has a whopping 50.3% weighting in the Growth index.
The five largest holdings in the Vanguard S&P 500 Growth index (and ETF) are from the tech sector. The table below displays their weightings relative to their weightings in the regular S&P 500:
|
Stock |
Vanguard S&P Growth ETF Weighting |
S&P 500 Weighting |
|---|---|---|
|
1. Apple |
12.40% |
6.97% |
|
2. Microsoft |
11.65% |
6.54% |
|
3. Nvidia |
11.03% |
6.20% |
|
4. Meta Platforms |
4.48% |
2.41% |
|
5. Amazon |
4.14% |
3.45% |
Data source: Vanguard. Portfolio weightings are accurate as of Aug. 31, 2024, and are subject to change.
Those five stocks have generated an average return of 48.3% this year, so it's only natural that an ETF that holds them in such a high concentration is performing extremely well. That's why the Vanguard ETF is up 24.3% year to date, comfortably outperforming the 19.1% gain in the S&P 500.
All five stocks are likely to continue driving the Vanguard ETF higher because of their presence in the artificial intelligence (AI) industry, which could be one of the most valuable tech revolutions in history. Goldman Sachs thinks AI will add $7 trillion to the global economy in the coming decade, whereas PwC pegs that number at $15.7 trillion by 2030.
Apple recently unveiled its new AI software, called Apple Intelligence, which will introduce powerful new capabilities to the iPhones, iPads, and Mac computers. Microsoft, on the other hand, is experiencing rapid growth in its Azure cloud segment, as businesses race to deploy AI into their operations.
Nvidia is at the heart of the entire AI revolution thanks to its graphics processing units (GPUs) for the data center, which facilitate AI development. The company's revenue grew by 122% in its recent quarter as tech giants like Microsoft, Amazon, and Alphabet invest tens of billions of dollars in building AI data centers.
The Vanguard ETF can beat the S&P 500 next year, too
The Vanguard S&P 500 Growth ETF has delivered a compound annual return of 16% since its inception in 2010, handily beating the average annual gain of 13.7% in the S&P 500 over the same period. That 2.3 percentage point differential would have made a big impact for investors in dollar terms due to the effects of compounding:
|
Initial Investment (2010) |
Compound Annual Return |
Balance in 2024 |
|---|---|---|
|
$10,000 |
16% (Vanguard ETF) |
$79,875 |
|
$10,000 |
13.7% (S&P 500) |
$60,345 |
Calculations by author.
We are still in the very early stages of the AI revolution. Oracle Chairman Larry Ellison recently said AI spending could grow for the next 10 years, and if that's the case, stocks like Apple, Microsoft, and Nvidia will likely continue to deliver strong returns. That will fuel a further outperformance in the Vanguard ETF next year (and beyond) relative to the S&P 500.
However, even if AI fails to live up to the hype, the Growth index will rebalance as necessary, which should help it maintain its performance advantage over the S&P 500. That's why -- as has consistently been the case -- the Vanguard S&P 500 Growth ETF is a great bet for investors looking to beat the S&P 500 in the new year.
