The S&P 500 has long been viewed because the benchmark for the stock market. It comprises about 500 of the most important corporations that trade on a significant U.S. stock exchange. It is a market-cap, weight-based index, which implies that the larger the corporate’s value, the larger the proportion of the index the stock represents.
Many investment professionals strive to beat the return of the S&P 500, but that has not proven to be a straightforward task. The index has generated strong results over time, averaging a 13.2% annual return over the past 10 years as of the tip of July. In keeping with S&P, over 87% of U.S. large-cap funds have underperformed the S&P 500 over the past decade.
Nevertheless, one exchange-traded fund (ETF) has consistently outperformed the S&P 500 over the past decade, and I believe that outperformance will proceed in the following decade as well. That ETF is the Vanguard Growth ETF (NYSEMKT: VUG).
An ETF that consistently outperforms the S&P 500
The Vanguard Growth ETF is analogous to ETFs that track the S&P 500, except that it tracks the CRSP US Large Cap Growth Index, which is essentially the expansion side of the S&P. The S&P 500 and Vanguard Growth ETF share lots of the same top holdings, however the Vanguard ETF generally holds them in a much higher percentage.
For instance, at the tip of the second quarter, Apple was the most important holding in each, however the iPhone maker was a 12.9% holding within the Vanguard Growth ETF versus 6.9% within the Vanguard S&P 500 ETF, which tracks the S&P 500.
Consequently, the Vanguard Growth ETF is way 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 one other nearly 17% in consumer discretionary stocks. By comparison, the Vanguard S&P 500 ETF’s largest sectors are technology at over 31%, followed by financials at 13%.
The Vanguard Growth ETF’s heavier weighting toward tech stocks has helped it outperform over time, with a 15.3% annualized return over the past decade as of the tip of July. While that will not sound like much of a difference from the S&P 500’s performance, the extra return on a $100,000 investment within the Vanguard Growth ETF versus the Vanguard S&P 500 ETF can be $73,580 over 10 years.
Why the Vanguard Growth ETF should proceed to outperform
While past performance is just not a guarantee of future performance, there’s a reason to imagine that the Vanguard Growth ETF will proceed to outperform the S&P 500 over the following decade.
The fund is way more heavily weighted toward tech stocks, which, for my part, gives it a long-term advantage. These corporations have the propensity to grow to grow to be the most important corporations on the planet. There’s a reason why nine of the S&P 500’s largest components are in tech-related corporations, which include Amazon and Tesla. In actual fact, Berkshire Hathaway is the one non-growth company within the S&P’s top 10 holdings.
On condition that growth corporations are inclined to grow to grow to be the world’s largest corporations, there’s reason to imagine that these corporations will proceed to outperform value corporations over the long term. Meanwhile, we’re currently within the early innings of what appears to be a significant technological shift with artificial intelligence (AI). As AI and technology proceed to alter the world, being chubby investments on this sector appears to be an excellent long-term bet.
With tech valuations greater than reasonable now, I predict that the Vanguard Growth ETF will proceed outperforming the S&P over the following decade.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Amazon, Apple, Berkshire Hathaway, Tesla, Vanguard Index Funds-Vanguard Growth ETF, and Vanguard S&P 500 ETF. The Motley Idiot has a disclosure policy.
Prediction: This ETF Will Outperform the S&P 500 Over the Next Decade was originally published by The Motley Idiot