The S&P 500 (^GSPC +1.01%) is made up of 500 companies from 11 different sectors of the economy, but since it's weighted by market capitalization, its largest constituents have a greater influence over its performance than the smallest. Trillion-dollar technology giants, like Nvidia and Amazon, have been among the best-performing stocks over the last two years, driving the bull market in the index.
The Vanguard Growth ETF (VUG +1.19%) is an exchange-traded fund (ETF) that invests exclusively in U.S. large-cap stocks. That means it assigns even higher weightings to stocks like Nvidia and Amazon than does the S&P 500, which has led to much better returns over the long run.
Here's why investors with a spare $420 (money they don't need for immediate expenses) might want to buy one share of the Vanguard Growth ETF and hold it forever.
Exclusively investing in America's highest-quality stocks
This Vanguard ETF is passively managed. Rather than investing in a basket of individual stocks selected by Vanguard's portfolio managers, the fund simply tracks the CRSP U.S. Large Cap Growth Index, which invests in the top 85% of American companies (by value).
To put it another way, think of all the publicly listed companies in the U.S. ranked by their market capitalization, from the biggest (like Apple and Nvidia) to the smallest. The CRSP U.S. Large Cap Growth Index starts by investing in the largest names, and moves down the list until it has captured 85% of the total market cap.
Surprisingly, the index only holds 179 stocks, despite there being over 3,500 American companies listed publicly. This highlights the extreme concentration of wealth in the corporate sector. In fact, the top five holdings in the Vanguard ETF have a combined market cap of $14.7 trillion on their own, and they make up 46.2% of the fund's entire portfolio:
|
Stock |
Vanguard ETF Portfolio Weighting |
|---|---|
|
1. Apple |
12.36% |
|
2. Microsoft |
10.69% |
|
3. Nvidia |
9.68% |
|
4. Amazon |
7.80% |
|
5. Alphabet |
5.76% |
Data source: Vanguard. Portfolio weightings are accurate as of Jan. 31, 2025, and are subject to change.
The above five stocks delivered an average return of 58.6% last year, and four of the five outperformed the S&P 500 (which gained 23%):
All five of them have become leaders in various segments of the artificial intelligence (AI) race. Apple is becoming a major distributor of AI to consumers via its Apple Intelligence software, which is now available on every new iPhone, iPad, and Mac computer. Nvidia, on the other hand, supplies the world's most powerful graphics processing units (GPUs) for data centers. These GPUs have become the gold standard for developing AI.
Microsoft, Amazon, and Alphabet have each developed their own AI virtual assistants, but they are also the three largest providers of AI cloud services in the world. They offer state-of-the-art data center infrastructure and ready-made large language models (LLMs), which are two of the key ingredients developers need to create AI software applications.
Although the technology sector makes up 57% of this Vanguard ETF, it also holds dozens of popular non-technology large-cap stocks, including Eli Lilly, Costco Wholesale, McDonald's, Boeing, Starbucks, and more.
Image source: Getty Images.
The Vanguard ETF can help investors beat the market
There are significant benefits to owning a slice of America's largest companies. They tend to have the strongest earnings, fortress balance sheets, and track records of success that span decades. Those high-quality attributes have propelled the Vanguard Growth ETF to a compound annual return of 11.7% since its inception in 2004, outpacing the average annual gain of 10.4% in the S&P 500 over the same period.
The Vanguard Growth ETF has delivered an accelerated compound annual return of 16.1% over the last 10 years, thanks to the incredible value created by technologies like cloud computing, enterprise software, and now, AI. That represents an even wider gap to the S&P 500, which gained 13.7% per year over the last decade.
A growing number of forecasts on Wall Street suggest AI could be one of the most valuable opportunities in history. Goldman Sachs predicts it will add $7 trillion to the global economy over the next 10 years, whereas PwC places that figure at $15.7 trillion by 2030.
No matter which forecast is closer to the mark, AI is likely to be the driving force behind further strength in the Vanguard Growth ETF going forward, since companies like Nvidia, Apple, and Microsoft will play a leading role in distributing it to businesses and consumers.
As a result, based on its track record and future potential, this is one ETF investors might want to buy and potentially never sell.
