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2024 is turning out to be another strong year for the stock market, with the S&P 500 on track for another year of 20%-plus returns. The benchmark index has produced total returns (including dividends) of nearly 25% as of this writing. That follows a total return of more than 26% in 2023.
In addition, the index is set for its fourth gain of 20% or more in the past six years. On a total return basis, it has only had two years of negative returns since the financial crisis of 2008. Those were in 2022, when it had a negative 18% total return, and 2018, when it had about a negative 4% total return. Meanwhile, there have been seven years with returns of 20% or more during that stretch.
While some investors may be a bit wary about adding money to stocks following two years of such strong returns, the market is just a little over two years into its current bull run. Meanwhile, since 1950, the average bull market in the S&P 500 has lasted about five and a half years, according to Carson Investment Research.
Against that backdrop, let's look at one Vanguard exchange-traded fund (ETF) that I think could be the top index fund performer in 2025.
Tech to lead the way again
While Vanguard has several great index funds to choose from, my top pick for 2025 is the Vanguard Growth ETF (NYSEMKT: VUG), which tracks the CRSP US Large Cap Growth Index. That index essentially represents the growth stock side of the S&P 500.
The ETF's portfolio is fairly heavily concentrated, with its top three holdings of Apple, Nvidia, and Microsoft representing nearly a third of its value. Add in the next largest four -- Amazon, Alphabet, Meta Platforms, and Tesla -- and you have just seven companies accounting for about 52.5% of the portfolio. This top-heavy weighting adds some risk, but it also positions the ETF to nicely outperform when the tech sector is healthy.
In fact, the Vanguard Growth ETF has a stellar track record, with an average annualized return of 15.6% over the past 10 years, as of the end of November. That easily surpasses the 13.4% average annual return of the S&P 500 over the same period. This year, it was up a better-than-usual 32.1% as of the end of November.
Its performance will continue to be heavily influenced by its top seven holdings -- and that's one reason why it is my top Vanguard ETF pick for 2025. All seven of its top holdings are strong plays on the artificial intelligence (AI) megatrend, which appears to still be in its early innings.
These companies are leaders across various aspects of AI, from AI chips to cloud computing to software to robotics to autonomous driving. As long as spending on AI remains strong and companies look to advance their AI models, I think these stocks by and large will continue to outperform the market.