2 Unstoppable Vanguard ETFs That Can Help You Beat the S&P 500 in the Long Term

Tech stocks are often the key ingredient to outperforming the broader market, but they come with risks.

THE S&P500 (^GSPC -0.74%) is trading at an all-time high thanks to its 11.8% gain this year so far. This adds to the long history of success of the index, which has generated a compound annual total return, i.e. dividends reinvested, of 10.4% since its launch on March 4, 1957.

One of the safest ways to invest in the stock market is to purchase shares in an exchange-traded fund (ETF) that closely tracks the performance of the S&P 500. However, ETF issuers, like Vanguard, also offer a wide selection of funds for investing in the stock market. suitable for investors with a higher risk appetite.

Some of them have a proven track record of beating the S&P 500 over a long period of time because they are heavily weighted in top-performing sectors like technology. Here is why the Vanguard S&P 500 Growth ETF (VOOG -0.40%) and the Vanguard Information Technology ETF (VGT -0.35%) could help investors outperform the market in the future.

1. Vanguard S&P 500 Growth ETF (VOOG)

Vanguard S&P 500 Growth ETFs is built to track the performance of the Growth of the S&P 500 index, which holds 228 of the 500 stocks in the S&P500. It selects these 228 stocks based on their momentum, revenue growth and the relationship between their earnings change and their stock prices.

In other words, only the top performers in the S&P 500 make it into the growth index (and the ETF), and the rest are excluded. Unsurprisingly, the fund’s top five holdings all come from the technology sector, which regularly outperforms the rest of the market:

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Vanguard S&P 500 Growth ETF Portfolio Weighting

Data source: Vanguard. Portfolio weightings are accurate as of April 30, 2024 and are subject to change.

Since the five stocks above represent 43.4% of the ETF’s total value, this value is heavily influenced by their performance. This has been extremely positive recently because Nvidia stocks, for example, have surged 165% over the past year. But if these trends reverse, it could lead to a period of poor returns for this ETF.

That said, each of these five companies is investing aggressively in new technologies like artificial intelligence (AI). Microsoft agreed to inject $10 billion into AI startup OpenAI last year, and it’s integrating the latest GPT-4 models into popular products like Windows, 365 (Word, Excel, and PowerPoint), and Azure cloud platform. Nvidia, on the other hand, designs the most powerful AI chips for the data center, where these models are developed.

Beyond its first five positions, the fund holds other technological powers like You’re here And Netflixbut it also contains many stocks outside of the technology sector like the industrial giant caterpillar and beverage conglomerate Coca-Cola.

The Vanguard S&P 500 Growth ETF was created in 2010 and has since generated a compound annual return of 15.3%, even after discounting its spending rate (annual contribution) of 0.1%. The S&P 500 returned 13.1% annually over the same period, and while that 2.2 percentage point difference each year doesn’t seem like much, it actually gets bigger over time:

Index/Fund

Starting balance (2010)

Compound Annual Return

Sale (2024)

Calculations by author.

2. Vanguard Information Technology ETF (VGT)

Investors who are comfortable taking on a little more risk in search of even better returns might prefer the Vanguard Information Technology ETF. It holds 312 different stocks, but it is much less diversified than the first ETF because it focuses only on the technology sector.

The Vanguard Information Technology ETF’s top five holdings represent 50.8% of its total portfolio value, so it is more concentrated than the Vanguard S&P 500 Growth fund. The composition of the top five ETFs is very similar between the two ETFs, but Vanguard Information Technology is even more heavily influenced by the performance of just a handful of stocks:

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Vanguard Information Technology ETF Portfolio Weighting

Data source: Vanguard. Portfolio weightings are accurate as of April 30, 2024 and are subject to change.

The higher weighting of these technology stocks is behind Vanguard IT’s outperformance relative to the Vanguard S&P 500 Growth and the S&P 500 (which I’ll talk about in a moment). Given Nvidia’s spectacular gain over the past year, for example, the fund that holds the most Nvidia shares has produced better returns. It’s so simple.

On the other hand, Vanguard IT will experience more downside than the Vanguard S&P 500 Growth and the S&P 500 if technologies like AI fail to live up to the hype. Even outside of its top five holdings, Vanguard IT holds a number of stocks exposed to AI success, including Advanced microsystems, Oracle, Micron technologyAnd Palo Alto Networksto name a few.

That being said, the ETF has generated a compound annual return of 12.9% since its launch in 2004, which is better than the S&P 500’s average annual gain of 9.7% over the same period. While AI is the futureVanguard IT has benefited from the proliferation of other technologies over the past two decades, including the Internet, e-commerce and cloud computing.

Technology trends have accelerated more recently, which is why the Vanguard Information Technology ETF has performed even better over the past 10 years, with a compound annual gain of 19.8%. This compares to a 12.4% annual gain for the S&P 500.

Simply put, investors looking for a way to beat the S&P 500 over the long term by owning a selection of high-quality technology stocks should look no further than the Vanguard Information Technology ETF – but they should always be aware of the risks.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony DiPizio has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Microsoft, Netflix, Nvidia, Oracle, Palo Alto Networks, Salesforce and Tesla. 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 Mad Motley has a disclosure policy.

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