The S&P 500 (^GSPC +0.54%) is having a strong year with a gain of 16.1% so far, which is much higher than its average annual return of 10.5% since it was established in 1957. However, had investors bought the Vanguard Growth ETF (VUG +0.50%) at the start of this year instead, they would be sitting on a much better return of 19.2%.
This exchange-traded fund (ETF) has actually outperformed the S&P 500 every year since its inception in 2004, mainly because it invests more aggressively in the stocks that typically deliver the highest returns. Names like Nvidia (NVDA 1.81%), Microsoft, and Amazon are just a few examples.
Here's why I think those stocks will drive the Vanguard Growth ETF to another market-beating return in 2026.
Image source: Getty Images.
High exposure to the leaders of the artificial intelligence race
The Vanguard Growth ETF tracks the CRSP U.S. Large Cap Growth index, which invests in the top 85% of American companies in the CRSP U.S. Total Market index by value. In other words, if we ranked all 3,498 stocks in the Total Market index in order of their size, the CRSP U.S. Large Cap Growth index would start at the top and invest in every company on the list until it captured 85% of their combined value.
Here's the interesting part: The Vanguard Growth ETF holds just 160 stocks. That's right, the top 160 listed American companies account for 85% of the entire value of all 3,498 companies in the Total Market index, meaning the remaining 15% of the value is spread across the other 3,338 companies. This really highlights the extreme concentration of wealth in the corporate sector, and technologies like artificial intelligence (AI) are widening the gap even further.
The top five holdings in the Vanguard ETF have a combined market capitalization of $18 trillion, and each of them plays a leading role in the AI race. Below its their individual weighting in the Vanguard ETF relative to their weighting in the S&P 500:
|
Stock |
Vanguard ETF Portfolio Weighting |
S&P 500 Weighting |
|---|---|---|
|
1. Nvidia |
12.53% |
8.46% |
|
2. Apple |
10.68% |
6.87% |
|
3. Microsoft |
10.28% |
6.59% |
|
4. Alphabet |
7.52% |
5.05% |
|
5. Amazon |
5.93% |
4.06% |
Data source: Vanguard. Portfolio weightings are accurate as of Oct. 31, 2025, and are subject to change.
Since the AI boom started gathering momentum in early 2023, Nvidia stock alone has delivered a staggering 1,130% return. Any fund or index with a high exposure to returns of that magnitude is going to outperform one with less exposure, hence it's no surprise the Vanguard ETF is beating the S&P 500.
Nvidia is heading into 2026 with more demand for its industry-leading AI data center chips than it can possibly supply, which should fuel another strong year of revenue and earnings growth for the company.
Microsoft, Alphabet, and Amazon are among Nvidia's top customers, and they are heading into the new year with accelerating revenue growth in their respective cloud divisions. They buy Nvidia's chips and rent the computing capacity to other businesses, who use it to develop and deploy their own AI software. If these three companies maintain their recent momentum next year, they could contribute to significant returns in the Vanguard ETF.
Although the ETF is very tech-heavy, it does offer some diversification. Non-technology stocks like Visa, Mastercard, Costco Wholesale, and McDonald's are sprinkled among its top 20 holdings.
NYSEMKT: VUG
Key Data Points
Why the Vanguard ETF could beat the S&P 500 again in 2026
The Vanguard Growth ETF has produced a compound annual return of 12.2% since its inception in 2004, so it has comfortably outperformed the S&P 500 which grew by an average of 10.4% per year over the same period.
The CRSP U.S. Large Cap Growth index (and by extension, the Vanguard ETF) rebalances once per quarter, eliminating any stocks which no longer meet its criteria in favor of better candidates. This is the secret to its strong returns; by holding just 160 of the highest-quality American growth stocks, it doesn't have exposure to some of the poor performers in the S&P 500 which can sometimes deliver much weaker -- or even negative -- returns.
For example, the slow-growing utilities sector only has a 0.1% weighting in the Vanguard ETF, whereas it accounts for 2.3% of the S&P 500. There is a similar disparity for the energy sector.
The technology industry is likely to continue driving the broader market higher in 2026, mainly thanks to AI. Earlier this month, Nvidia CEO Jensen Huang said data center operators could spend a staggering $4 trillion annually on AI infrastructure by 2030, which means a growing amount of money could flow to suppliers of chips and networking equipment every year until then.
If that's the case, 2026 might look very similar to 2025 in terms of stock market returns, which means the Vanguard ETF is likely to beat the S&P 500 yet again.
