The S&P 500(SNPINDEX: ^GSPC) delivered a return of 25% (including dividends) last year, but had you invested in the Vanguard S&P 500 Growth ETF(NYSEMKT: VOOG) instead, you would have earned a much higher return of 35.9%. The exchange-traded fund (ETF) tracks the performance of the S&P 500 Growth index, which holds 211 of the best-performing growth stocks from the regular S&P 500.
But last year's result wasn't a one-off because the Vanguard ETF has outperformed the S&P 500 every year, on average, since it was established in 2010. Here's why I think that trend will continue in 2025, despite the ETF starting the year on the back foot relative to the S&P.
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Large holdings in the fastest-growing S&P 500 companies
The S&P 500 has a very strict entry criteria. To qualify for inclusion, companies must have a market capitalization of at least $20.5 billion, and the sum of their earnings must be positive over the most recent four quarters. But even after ticking those boxes, a special committee meets once per quarter to decide which companies make the cut.
The S&P 500 Growth index refines those criteria even further. It selects stocks from the regular S&P 500 based on factors like their momentum and the sales growth of the underlying companies. That's why Nvidia is the largest holding in the Vanguard S&P 500 Growth ETF -- the company grew its revenue by 114% during its last fiscal year, and its stock more than doubled in both 2023 and 2024, signaling clear momentum.
In fact, compared to the S&P 500, the Vanguard ETF assigns much higher weightings to the sectors that host many of the largest and fastest-growing American companies.
Sector
Popular Stocks
Vanguard ETF Weighting
S&P 500 Weighting
Information Technology
Nvidia, Microsoft, and Apple
37%
29.6%
Communication Services
Alphabet, Meta Platforms, and Netflix
14.4%
9.2%
Consumer Discretionary
Amazon, Tesla, and McDonald's
12.4%
10.3%
Data source: Vanguard. Sector weightings are accurate as of March 31, 2025, and are subject to change.
Microsoft, Alphabet, and Amazon just reported their financial results for the first quarter of 2025 (ended March 31), and each company exceeded Wall Street's expectations at the top and bottom line. Their cloud computing segments continued to deliver rapid growth, led by soaring demand for artificial intelligence (AI) services. Meta Platforms' financial results also received a boost from AI during the first quarter, as the technology helped drive higher engagement on Facebook and Instagram.
According to PwC, AI could add an eye-popping $15.7 trillion to the global economy by 2030, so it could power the next long-term growth phase for companies like Microsoft, Alphabet, Amazon, Meta, Apple, Tesla, and Nvidia.
But despite being heavily weighted toward tech and tech-adjacent companies, the Vanguard ETF is actually quite diversified. Among its top 20 holdings, investors will also find payment giants Visa and Mastercard, Warren Buffett's Berkshire Hathaway, investment bank JPMorgan Chase, and retail powerhouses Costco Wholesale and Walmart.
The Vanguard ETF has a great chance to beat the S&P 500 again in 2025
The Vanguard S&P 500 Growth ETF is down 4.3% so far in 2025, so it's doing slightly worse than the S&P 500, which is down by just 3.7%. The high-growth segments of the stock market were trading at elevated valuations heading into President Trump's "Liberation Day" tariff announcements in early April, so they suffered much steeper declines than the broader market when investors flocked to the safety of cash.
However, the ETF has delivered a compound annual return of 15.4% since it was established in 2010, outpacing the average annual gain of 12.8% in the S&P 500 over the same period.
I think that trend will continue in 2025 for a couple of reasons. First, President Trump has already paused the more aggressive "reciprocal tariffs" he imposed on America's trading partners (except those on China), as dozens of countries have come to the table to negotiate new deals.
Second, many of the products sold by the top holdings in the Vanguard ETF aren't affected by tariffs. Semiconductors are exempt, for example, much to the benefit of companies like Nvidia and Broadcom. Moreover, digital subscription products, digital advertising, and cloud services were never subjected to Trump's tariffs at all, which is great news for Microsoft, Alphabet, Meta, and even Amazon to a lesser extent (its e-commerce business is grappling with tariffs).
Third, the strong earnings results from the companies I mentioned earlier should help the Vanguard ETF recover its current deficit to the S&P 500. Stocks like Microsoft and Meta both erased their year-to-date losses following their reports for the recent quarter and are trading in the green as of this writing.
Even in the event of an economic slowdown or a recession, those tech giants are likely to hold up better than the rest of the market because of the composition of their product portfolios, their enormous scale, and their strong balance sheets.
As a result, I think there is a very high chance the Vanguard S&P 500 Growth ETF recovers to beat the S&P 500 yet again in 2025.
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JPMorgan Chase is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Costco Wholesale, JPMorgan Chase, Meta Platforms, Microsoft, Netflix, Nvidia, Tesla, Visa, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
