You can do better than the S&P 500. Buy this ETF.

There is nothing wrong with S&P 500 (^GSPC -0.13%) market index.

Reflects the overall health of the US market with a quality filter based on market capitalization. Investing in this market tracker through exchange traded funds (ETFs) like SPDR S&P 500 Trust (SPY -0.14%) it gives you plenty of diversification and sets you up for solid long-term returns.

If you invested $1,000 in the SPDR fund 10 years ago and positioned yourself to reinvest the dividend payments in more stocks, you’d have $3,500 today. That’s a compound annual growth rate (CAGR) of 13.2%, leaving inflation rates well behind. Many investors start in a popular SPDR 500 fund and let it run for decades, building wealth without any investor effort.

But what if I told you there are ETFs with even better long-term returns? For example, the Vanguard Information Technology ETF (VGT -0.74%) tends to outperform S&P 500 returns over the long term. It is one of my favorite ETFs. Let me show you how it works.

total return price VGT; data by YCharts.

Why this Vanguard fund is one of my favorite ETFs for long-term growth

As you can see in the chart above, the Vanguard IT ETF has crushed the S&P 500 and its index trackers over the past decade. The total return amounts to a CAGR of 20.9%. During this period, a hypothetical investment of $1,000 would have grown to $6,678.

And this is just a simple one-time move, with no other cash investments added over time. Let’s instead imagine an automated dollar cost averaging plan, starting with just $100 in the fall of 2014 and adding another $100 to that Vanguard IT ETF position per month. Some investors may do this as a payroll deduction, others may set up automatic transfers, and some may prefer to do it manually.

Whichever method you use, these fairly painless contributions would add up to $12,000 over a decade. The return on investment would be approximately $29,000, resulting in a total investment value of $41,118.

Doing the same with the SPDR S&P 500 fund would also have produced respectable results. That same $12,000 investment should be worth $25,174 by now, more than doubling your money in 10 years.

Like I said, there’s nothing wrong with that. However, I would prefer to get stronger returns from the IT market tracker.

There is no reward without additional risk

Of course, I cannot promise market returns in every imaginable time period. The fund underperformed the S&P 500 in its first five years on the market, ending amid the 2008-2009 subprime market collapse. The inflation crisis of 2022 was no fun for Vanguard IT ETF investors.

In challenging markets such as these handpicked examples, ETF focus on high-growth investment ideas can result in deeply negative returns. I had to look for these bad examples, and this ETF tends to beat the S&P 500 over long periods of time.

However, this might not be the fund for you if you can’t afford the occasional price drop along the way. The fund outperforms in most cases, but it can really hurt when growth stocks hit a brick wall.

How this ETF’s portfolio differs from the S&P 500

The fund tracks a market index that reflects all US stocks in the information technology sector, resulting in a list of 317 names at its most recent update.

They are weighted by market capitalization. Therefore, titans of technology Apple (AAPL 0.12%), Microsoft (MSFT -0.76%)and Nvidia (NVDA -2.13%) are the three biggest holdings these days. These three stocks add up to about 48% of the total portfolio.

The same three companies also dominate the S&P 500, but their combined weight stops at just 20% right now. The IT Index includes many stocks that are too small for the S&P 500.

So the IT-focused fund puts a heavier burden on the biggest companies, but also allows smaller businesses to contribute to the overall score. It’s another balancing act that raises market risks as well as potential returns.

Is the Vanguard Information Technology ETF Right for You?

You’ve seen the long-term benefits and we’ve shown you the potential downsides. I don’t mind if you prefer something like the SPDR S&P 500 ETF after all. It will probably let you sleep better at night, at least during challenging times like the market crashes I highlighted earlier.

I’m glad I showed you a more interesting option. The Vanguard Information Technology ETF isn’t every investor’s cup of tea, and that’s okay. I recommend taking a sip though. These exciting ideas with high growth can be intoxicating in the long run.