1 Unstoppable Vanguard ETF You Can Confidently Buy With $350 Through 2025

Joining the S&P 500 (^GSPC -0.14%) is a prestigious achievement for any American company. The index has strict inclusion criteria: companies must have a market capitalization of at least $18 billion and generate positive earnings. But even then, inclusion is at the discretion of a special committee that rebalances the index once a quarter.

Then there's this S&P 500 growth Index that uses even stricter criteria to reduce the 500 companies from the regular S&P to the best-performing stocks. As of this writing, only 231 companies are owned, the rest are ignored. As a result, the growth index consistently outperforms the S&P 500 every year.

The Vanguard S&P 500 Growth ETF (VOOG -0.19%) Directly tracks growth index performance by holding similar stocks and maintaining similar portfolio weights. For this reason, investors with $350 in cash to spare can confidently purchase the ETF through 2025.

Large holdings of the highest quality stocks

Both the S&P 500 and S&P 500 Growth indexes are weighted by market capitalization, meaning the largest stocks have a greater impact on their performance than the smallest. Technology is the largest of 11 different sectors in the S&P 500, with a weighting of 31%.

The growth index selects stocks based on their momentum and the revenue growth of the underlying companies. As tech giants like Nvidia If companies tend to lead the rest of the market due to these factors, it's no surprise that the growth index has a much higher weighting of the technology sector at 49.9%.

In fact, most of the top 10 holdings in the Vanguard S&P 500 Growth ETF are in the technology industry, and they each have a much higher weighting than the regular S&P 500:

Data source: Vanguard. Portfolio weights are as of August 31, 2024 and are subject to change.

Every company in this top 10 is currently creating value through the development and use of artificial intelligence (AI). Even Eli Lilly – a biopharmaceutical company – signed partnerships with startups like OpenAI and Genetic Leap earlier this year to help develop various drugs and therapies.

Tesla, known as an electric vehicle company, is also developing AI to power its autonomous self-driving software.

Apple, on the other hand, has more than 2.2 billion active devices worldwide, meaning the company could soon become the largest provider of AI for consumers with its Apple Intelligence software. It's currently only available on the latest devices like the M3 MacBooks and iPhone 16, so the new AI features could drive a powerful upgrade cycle over the next few years.

Microsoft, Amazon and Alphabet have each created their own AI models, virtual assistants and chatbots. In addition, they are the three largest providers of cloud computing services in the world. These cloud platforms have become distribution channels for AI models and data center computing capacity that companies need to develop and deploy AI software.

Nvidia develops the semiconductor industry's most powerful graphics processing units (GPUs) for the data center, which are at the heart of everything I just mentioned. The chips are in demand from OpenAI, Tesla, Microsoft, Amazon, Alphabet and almost every other tech giant looking to capitalize on the AI ​​opportunity.

The Vanguard ETF could beat the S&P 500 (again) next year

The Vanguard S&P 500 Growth ETF is up 27.6% so far in 2024, outpacing the 21.5% gain in the S&P 500. Why? The top 10 stocks in the table above have returned an average of 43.7% this year, so the index that assigns them a higher weight will naturally perform better.

This is a consistent theme for the Vanguard ETF (and the Growth Index). Since its inception in 2010, the company has generated an average annual return of 16%, significantly exceeding the S&P 500's average annual return of 13.7% over the same period.

The ETF rebalances every quarter by replacing its underperforming stocks. In other words, in the long run it will almost always outperform the S&P 500 because it doesn't have to hold the stocks in that index that don't perform well.

The only time the S&P 500 could Performance occurs when dividend stocks experience a period of outperformance compared to growth stocks.

The following graphic overlays the Vanguard ETF with the S&P 500 high dividend Index. Growth stocks have only underperformed dividend stocks for one year in the last decade, and there is a big difference in total returns for that entire period, making the Vanguard ETF an obvious choice:

VOOG data from YCharts

For this reason, the Vanguard ETF looks like a good buy for 2025. However, investors should always take a long-term approach as the difference in returns between the ETF and the S&P 500 over time can have a significant impact in dollar terms. Effects of Compounding:

Author's calculations.