Prediction: This relentless Vanguard ETF will beat the S&P 500 again in 2025

The S&P 500 is in the middle of a strong bull market. The index is up 20.8% this year, which is already more than double its average annual profit dates back to its founding in 1957 Vanguard S&P 500 Growth ETF (VOOG 2.52%) is doing even better with an increase of 27% since the beginning of the year. This exchange-traded fund (ETF) has also beaten the S&P 500 every year on average over the past two decades.

The ETF directly tracks the performance of the S&P 500 growth indexwhich only includes the best-performing stocks in the S&P 500 and ignores the rest. This means that powerhouses such as: B. much higher weights can be assigned Nvidiawhich usually results in much better returns. That's why I predict the Vanguard S&P 500 Growth ETF will beat the S&P 500 again in 2025.

Image source: Getty Images.

Almost half of the ETF is invested in technology stocks

Strict entry criteria apply to the S&P 500. Companies must have a market capitalization of at least $18 billion and must also be profitable over the last 12 months. Even then, inclusion is at the discretion of a special committee that rebalances the index once a quarter.

But the S&P 500 Growth Index has even narrower criteria. It analyzes the revenue growth of all 500 companies in the S&P 500 as well as the dynamics of their stock prices and includes only the top 233 names (as of this writing), while ignoring the rest.

Both the S&P 500 and S&P 500 Growth Indexes are market capitalization weighted, meaning their largest holdings have a greater impact on their performance than their smallest. Since the information technology sector is home to the three largest companies in the world – Nvidia, AppleAnd Microsoft – it tends to dominate both indices.

The information technology sector has a 31.7% weighting in the S&P 500 and a whopping 49.8% weighting in the S&P 500 Growth Index (and the Vanguard S&P 500 Growth ETF).

Higher weighting of the best performing stocks

The following table shows the five largest holdings in the Vanguard S&P 500 Growth ETF and their individual weightings compared to the S&P 500 Index.

Data source: Vanguard. Portfolio weights are as of September 30, 2024 and are subject to change.

The above five stocks have returned an average of 57.7% in 2024. Since the Vanguard S&P 500 Growth ETF assigns them a much higher weighting than the S&P 500, this explains the ETF's outperformance this year.

NVDA data from YCharts.

Artificial intelligence (AI) has become a key growth driver for each of these five companies. Nvidia stock's incredible gains over the past two years have been driven by increasing demand for its data center graphics processing units (GPUs), which are the most powerful in the industry for developing AI models. The company will begin shipping its new Blackwell GPUs later this year, and CEO Jensen Huang says demand is “insane.”

Apple recently launched its Apple Intelligence software for its latest iPhones, iPads and MacBooks. This software was developed in collaboration with OpenAI. It allows users to instantly summarize and generate textual content for messages and emails, and it even learns to prioritize certain notifications. Apple Intelligence is also transforming the voice assistant Siri by giving it the knowledge and capabilities of OpenAI's ChatGPT.

Microsoft and Amazon have each developed their own AI-powered virtual assistants. Additionally, as the world's two leading cloud service providers, they have also become the go-to source for developers seeking access to AI data centers and the latest large language models (LLMs) to help them develop AI software.

The Vanguard S&P 500 Growth ETF could beat the S&P 500 (again) in 2025

The Vanguard S&P 500 Growth ETF has generated an average annual return of 16% since its launch in 2010. That significantly exceeds the S&P 500's average annual gain of 13.7% over the same period. That 2.3 percentage point difference makes a big difference in the long run, thanks to the magic of compounding.

Author's calculations.

The S&P 500 Growth Index and the Vanguard S&P 500 Growth ETF rebalance each other quarterly by replacing their underperforming stocks. This ensures that the growth index almost always outperforms the regular S&P 500 because it doesn't have to hold stocks that don't deliver strong returns.

The only way the S&P 500 could perform better is if dividend stocks outperform growth stocks, but that rarely happens. The chart below overlays the Vanguard S&P 500 Growth ETF with the S&P 500 high dividend indexand it shows that growth stocks have underperformed dividend stocks in only one year over the past decade.

VOOG data from YCharts.

For this reason, I think the Vanguard S&P 500 Growth ETF has a great chance of outperforming the S&P 500 again in 2025, especially if trends like AI gain momentum.