It's not easy to beat the S&P 500 index. Most professional investors don't, even though they charge an arm and a leg for managing your money. Ironically, you don't need some fancy, complex trading strategy to produce fantastic investment results. The right approach, no matter how simple, can produce stellar results.
And sometimes, simplicity is better. Take the Vanguard Growth ETF (VUG 0.56%), for instance. This boring index fund has beaten the S&P 500 over its lifetime!
What's its secret? Read on to discover how this simple index fund can be the simple millionaire-making investment you'll want in your portfolio.
Beating the S&P 500 doesn't get more simple than this
You don't need to be a stock-picking wizard to outperform the S&P 500 index. You've only needed to buy and hold the Vanguard Growth ETF. This index fund has outperformed the S&P 500, and it's no fluke. The fund has existed since 2004, so its track record spans two decades, including multiple bull and bear markets.
VUG Total Return Price data by YCharts
Let's rewind a minute. The Vanguard Growth ETF is an index fund, which means it's an exchange-traded fund constructed to mimic a stock market index. Indexes are baskets of stocks intended to give investors an idea of how the market or the economy is performing. Some indexes are wide-ranging, while others are narrow and drill into a specific industry or market segment.
You've probably heard of famous indexes like the Dow Jones Industrial Average and the S&P 500. The Vanguard Growth ETF follows an index, too, but it's not as well known. It follows the CRSP US Large Cap Growth Index, an index of nearly 200 growth stocks that are primarily large caps (market caps over $10 billion).
Buying one share of the Vanguard Growth ETF is like buying a little piece of all the companies in this index. It's an easy way to diversify your investments.
What's the secret?
The Vanguard Growth ETF's performance is more about the investment strategy than the specific stocks within the fund.
Most stocks on the market fall into two categories: growth and value. Growth stocks are rapidly expanding companies and often prioritize revenue growth or taking market share over profitability. Meanwhile, value stocks are generally mature companies that are highly profitable and focus more on returning profits to investors as dividends or share repurchases.
Growth stocks tend to be more volatile but perform better over time as their growth compounds. The Vanguard Growth ETF leans heavily into high-growth market sectors like technology (58% of the fund) and consumer discretionary (18%). The S&P 500 has exposure to these sectors, but less so because it's more diversified. Technology stocks account for 32%, and consumer discretionary stocks are 10%.
The bottom line? The Vanguard Growth ETF has more risk and volatility but more potential upside. That has played out over time.
Why the Vanguard Growth ETF can still deliver significant returns
NYSEMKT: VUG
Key Data Points
Again, it's about the philosophy rather than specific stocks. Stock market indexes, including the CRSP US Large Cap Growth Index, will evolve as companies emerge or fall off. Additionally, the outlook for growth stocks, especially technology stocks, seems promising. Society has progressed from the internet to cloud computing, and now artificial intelligence (AI) is the next phase of technological evolution.
Technology heavyweights like Apple, Microsoft, and Nvidia dominate the index fund, and these companies are set to play a significant role in AI's long-term growth.
Remember that growth stocks don't always perform well. These companies usually trade at higher valuations, which makes them prone to steep sell-offs during market downturns. Investors saw this in 2022 when rising interest rates favored value stocks. Predicting these market cycles is impossible, so focus on the long term and continually add new savings to your investments.
Do that, and the Vanguard Growth ETF could help you build life-changing wealth over the next two or three decades.
