The S&P 500 is the stock market's most important index, tracking the 500 largest American companies on the market. It has become the main benchmark investors use to measure their returns, with outperformance and underperformance largely dependent on how it compares.
Although investing in an S&P 500 ETF has proven to be a great way to build wealth over time, there are plenty of investments that have routinely bested the index. One of them is the Vanguard Morningstar Growth ETF (VUG +0.34%), which is underperforming this year, but has historically outperformed and has the potential to keep the streak going.
NYSEMKT: VUG
Key Data Points
What you're getting with VUG
VUG focuses on large-cap growth stocks, which provides the best of both worlds: the (relative) long-term stability that comes with larger companies, plus growth opportunities. Although VUG holds 147 stocks, most of its performance depends on its top holdings, with the top 10 making up 61.8% of the fund:
- Nvidia: 12.60%
- Apple: 11.64%
- Microsoft: 7.60%
- Alphabet (Class A): 5.74%
- Alphabet (Class C): 4.52%
- Amazon: 4.46%
- Broadcom: 4.27%
- Meta Platforms: 3.40%
- Tesla: 3.26%
- Eli Lilly: 2.80%
These companies have proven track records, but are also built and positioned to thrive for the long haul. The growth nature of the ETF means it's predominantly tech stocks (69.2%), but other noteworthy sectors represented are consumer discretionary (13.9%), industrials (7.6%), and healthcare (4.6%).
Image source: Getty Images.
How VUG has performed over the years
Every index, stock, or ETF has a down period; what matters is how it performs over time. Since VUG began trading in January 2004, it has outperformed the S&P 500 by 1,262% to 929%. A $1,000 investment in each at that time would now be worth around $13,620 and $10,290, respectively (not accounting for VUG's 0.03% expense ratio).
The S&P 500 has had a better year and past 12 months, but here is how their returns compare across different years.
| Investment | 1-Year Returns | 3-Year Annual Average | 5-Year Annual Average | 10-Year Annual Average |
|---|---|---|---|---|
| VUG | 17.7% | 23.4% | 12.4% | 16.9% |
| S&P 500 | 22.4% | 19.7% | 11.8% | 13.5% |
Data source: YCharts. Averages as of market close on Aug. 7.
VUG has outperformed the S&P 500 for 13 of the last 20 years. However, its underperformance this year is mainly due to the "sluggish" returns of its top holdings, especially the "Magnificent Seven" stocks, which account for 53.2% of VUG and 31.6% of the S&P 500.
Investors have been rotating out of major tech stocks like the Mag 7 and into more niche tech stocks (like memory stocks) to find more value, but I believe investors will return to the proven industry leaders as the AI gold rush continues to develop and mature.
I would still prefer the bulk of my portfolio to be in the S&P 500 because of its diversification and exposure to more value stocks, but if you're looking to dedicate a portion of your portfolio to a growth ETF, VUG is a great go-to choice. Just be aware of the overlap, so you don't become too tech-heavy.
