This unstoppable Vanguard ETF will beat the S&P 500 again in 2025

The S&P500 is an index that includes 500 of the highest quality companies listed on U.S. stock exchanges. It has strict inclusion criteria. Companies must have a market capitalization of at least $18 billion and generate positive earnings. Even then, inclusion is at the discretion of the index committee.

The S&P 500 is weighted by market capitalization, meaning that the largest companies in the index have a greater impact on its performance than the smallest. That's why the technology sector – which includes trillion-dollar giants like NVIDIA, AppleAnd Microsoft — currently has a weighting of 31.4%, making it the largest in the index.

But then there is the S&P 500 Growth Index that includes only 231 of the best performers from the S&P 500 and ignores the rest. The Growth Index has comfortably beaten the S&P 500 over the long term for this reason, and this trend is likely to continue due to its composition.

The Vanguard S&P 500 ETF (WKN: A2P5T8) directly tracks the performance of the growth index by holding the same stocks and maintaining similar weightings. With 2025 just around the corner, I think this ETF is a good bet to beat the S&P 500 again for the following reasons.

Why the S&P 500 Growth Index tends to outperform the S&P 500

The growth index selects stocks from the S&P 500 based on factors such as their momentum and the revenue growth of the underlying companies. Since technology stocks often lead the rest of the market in both areas, it's no surprise that the sector has a whopping 50.3% weighting in the growth index.

The top five holdings in the Vanguard S&P 500 Growth Index (and ETF) are in the technology sector. The following table shows their weighting relative to their weighting in the regular S&P 500:

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

These five stocks have returned an average of 48.3% this year, so it's only natural that an ETF holding them in such high concentrations would perform extremely well. That's why the Vanguard ETF is up 24.3% year-to-date, easily outperforming the S&P 500's 19.1% gain.

All five stocks are expected to drive the Vanguard ETF higher due to their presence in the artificial intelligence (AI) industry, which could be one of the most valuable technology revolutions in history. Goldman Sachs expects AI to contribute $7 trillion to the global economy over the next decade, while PwC estimates that figure to reach $15.7 trillion by 2030.

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Apple recently unveiled its new AI software called Apple Intelligence, which will bring powerful new capabilities to iPhones, iPads and Mac computers. Microsoft, on the other hand, is experiencing rapid growth in its Azure cloud segment as companies race to adopt AI in their operations.

Nvidia is at the center of the entire AI revolution thanks to its data center graphics processing units (GPUs) that facilitate AI development. The company's revenue grew 122% last quarter, while tech giants like Microsoft, Amazon and alphabet invest tens of billions of dollars in building AI data centers.

The Vanguard ETF can beat the S&P 500 again next year

The Vanguard S&P 500 Growth ETF has delivered an annual return of 16% since its inception in 2010, significantly outperforming the S&P 500's average annual gain of 13.7% over the same period. This 2.3 percentage point difference would have had a big impact on investors in dollar terms due to the effects of compounding:

Calculations by the author.

We are still at a very early stage of the AI ​​revolution. oracle Chairman Larry Ellison recently said that AI spending could increase over the next decade. If that's the case, stocks like Apple, Microsoft, and Nvidia will likely continue to deliver strong returns. This will cause the Vanguard ETF to outperform the S&P 500 even more over the next year (and beyond).

But even if AI doesn't live up to expectations, the Growth index will rebalance as needed, which should help it maintain its performance advantage over the S&P 500. That's why the Vanguard S&P 500 Growth ETF is – as always – a great bet for investors looking to beat the S&P 500 in the new year.

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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 of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio does not own any of the stocks mentioned. The Motley Fool owns and recommends Alphabet, Amazon, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool 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.

Prediction: This unstoppable Vanguard ETF will beat the S&P 500 in 2025 was originally published by The Motley Fool