Prediction: This ETF will outperform the S&P 500 over the next decade

The S&P 500 has long been regarded as the benchmark for the stock market. It includes approximately 500 of the largest companies that trade on a major US exchange. It is a market capitalization weighted index, meaning that the higher the value of the company, the higher the percentage of the index that the stock represents.

Many investment professionals strive to beat the return of the S&P 500, but this has proven to be no easy task. The index has generated strong results over the years, with an average annual return of 13.2% over the past 10 years as of the end of July. According to S&P, more than 87% of US large-cap funds have underperformed the S&P 500 over the past decade.

However, an exchange-traded fund (ETF) has consistently outperformed the S&P 500 over the past decade, and I believe the outperformance will continue into the next decade. That ETF is Vanguard Growth ETF (VUG 1.15%).

An ETF that consistently outperforms the S&P 500

The Vanguard Growth ETF is similar to ETFs that track the S&P 500, except it tracks the CRSP US Large Cap Growth Index, which is basically the growth side of the S&P. The S&P 500 and the Vanguard Growth ETF have many of the same top holdings, but the Vanguard ETF generally holds a much higher percentage of them.

For example, at the end of the second trimester, Apple was the largest holding in both, but the iPhone maker had a 12.9% holding in the Vanguard Growth ETF versus 6.9% in Vanguard S&P 500 ETFwhich tracks the S&P 500.

As a result, the Vanguard Growth ETF is much more heavily weighted toward technology and consumer discretionary stocks than the S&P 500. Nearly 60% of its portfolio composition is in technology stocks, with another nearly 17% in consumer discretionary stocks. By comparison, the Vanguard S&P 500 ETF’s largest sectors are technology at more than 31%, followed by financials at 13%.

The Vanguard Growth ETF’s higher weighting of tech stocks has helped it outperform over the years, with an annualized return of 15.3% over the past decade as of the end of July. While that might not sound like a huge difference to the performance of the S&P 500, the incremental return on a $100,000 investment in the Vanguard Growth ETF versus the Vanguard S&P 500 ETF would be $73,580 over 10 years.

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Why the Vanguard Growth ETF Should Continue to Outperform

While past performance is no guarantee of future performance, there is reason to believe that the Vanguard Growth ETF will continue to outperform the S&P 500 over the next decade.

The fund is heavily weighted to technology stocks, which in my view gives it a long-term advantage. These companies tend to grow to become the largest companies in the world. There’s a reason nine of the largest components of the S&P 500 are in technology-related companies, which include Amazon and adze. Actually, Berkshire Hathaway is the only non-growth company in S&P’s top 10 holdings.

Given that growth companies tend to grow to become the largest companies in the world, there is reason to believe that these companies will continue to outperform value companies over the long term. Meanwhile, we are currently in the early stages of what appears to be a major technological shift with artificial intelligence (AI). As AI and technology continue to change the world, overweight investments in this sector appear to be a good long-term bet.

With tech valuations more than reasonable now, I predict the Vanguard Growth ETF will continue to outperform the S&P over the next decade.