Prediction: This Unstoppable Vanguard ETF Will Beat the S&P 500 Again in 2025

The S&P 500 is an index of 500 of the highest quality companies listed on US stock exchanges. It has strict entry criteria. Companies need a market capitalization of at least $18 billion and must also generate positive earnings. Even then, admission is at the discretion of the Index Committee.

The S&P 500 is weighted by market capitalization, meaning that the largest companies in the index have a greater influence on its performance than smaller ones. That’s why the tech sector — which includes trillion-dollar giants like Nvidia, Appleand Microsoft — currently has a weight of 31.4%, making it the largest in the index.

But then there is S&P 500 rise index, which only holds 231 of the best performers in the S&P 500 and does not consider the rest. The growth index has comfortably outperformed the S&P 500 over the long term for this reason, and that trend is likely to continue due to its composition.

The Vanguard S&P 500 Growth ETF (VOOG 0.07%) 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 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 such as their momentum and sales growth of the underlying companies. Since tech stocks often lead the rest of the market on both fronts, it’s no wonder the sector has a whopping 50.3% weight in the growth index.

The five largest holdings in the Vanguard S&P 500 Growth Index (and ETF) are in the technology sector. The table below shows their weights relative to their weights in the regular S&P 500:

Data source: Vanguard. Portfolio weightings are accurate as of August 31, 2024 and are subject to change.

The five stocks have generated an average return of 48.3% this year, so it’s only natural that an ETF holding them in such a high concentration would perform extremely well. That’s why the Vanguard ETF is up 24.3% year to date, comfortably outpacing the S&P 500’s 19.1% gain.

All five stocks are likely to continue the growth of the Vanguard ETF because of their presence in the artificial intelligence (AI) industry, which could be one of the most valuable technological revolutions in history. Goldman Sachs believes AI will add $7 trillion to the global economy over the next decade, while PwC puts the figure at $15.7 trillion by 2030.

Apple recently unveiled its new AI software, called Apple Intelligence, which will introduce powerful new capabilities to iPhones, iPads, and Mac computers. Microsoft, on the other hand, is experiencing rapid growth in its Azure cloud segment as companies race to implement AI in their operations.

Nvidia is at the center of the entire AI revolution thanks to its data center graphics processing units (GPUs) that facilitate AI development. The company’s revenue rose 122% in its most recent quarter as tech giants like Microsoft, Amazon and Alphabet is investing tens of billions of dollars in building AI data centers.

The Vanguard ETF can beat the S&P 500 next year as well

The Vanguard S&P 500 Growth ETF has delivered a compound annual return of 16% since its inception in 2010, handily beating the 13.7% average annual gain in the S&P 500 over the same period. That 2.3 percentage point difference would have had a big impact for investors in dollar terms because of the compounding effects:

Calculations by author.

We are still in the early stages of the AI ​​revolution. Oracle Chairman Larry Ellison recently said that spending on artificial intelligence could increase over the next 10 years, and if it does, stocks like Apple, Microsoft and Nvidia will likely continue to deliver strong returns. This will fuel another Vanguard ETF performance against the S&P 500 next year (and beyond).

However, even if AI fails to live up to the hype, the growth index will rebalance if necessary, which should help it maintain its performance advantage over the S&P 500. That’s why , as it consistently has been, the Vanguard S&P 500. Growth ETF is a great bet for investors looking to beat the S&P 500 in the new year.