Prediction: This Vanguard ETF Is Set to Outperform the S&P 500 Again in 2025

The S&P 500 is experiencing an impressive year, currently up 27.3%, this figure exceeds its average annual return since 1957 by more than double, the Vanguard Growth ETFs are outshining the index, boasting a year-to-date gain of 30.9%.

The Vanguard ETF has a solid history of outperforming the S&P 500, averaging annual gains above the index since its inception in 2004.

Given that the technology sector is expected to keep driving the broader market upward, here’s why I believe the Vanguard ETF will once again surpass the S&P 500 in 2025.

Significant Investments in America’s Leading Growth Stocks

The Vanguard ETF focuses exclusively on large-cap growth companies in the U.S., featuring 182 stocks across 12 different sectors. Notably, the technology sector makes up the largest portion of its portfolio, representing 58%.

In contrast, the S&P 500 comprises 500 companies, with the technology sector accounting for 31.7% of its overall allocation. This indicates that the Vanguard ETF is significantly more concentrated, which could introduce additional risk during periods of tech stock underperformance.

The top three holdings in the Vanguard ETF are all within the technology sector, collectively making up over one-third of the fund's total value. The top five are complemented by Amazon from the consumer discretionary sector and Meta Platforms from the communication services sector.

Leading the AI Revolution: Top Tech Stocks Drive Impressive Returns in 2024

Apple, Nvidia, Microsoft, Amazon, Meta Platforms, these five companies are at the cutting edge of the AI revolution, excelling in both hardware and software within this emerging industry. Their stocks have achieved an average return of nearly 61% in 2024, with Nvidia leading the way, skyrocketing by 173% due to the immense demand for its AI data center chips.

Since the Vanguard ETF assigns a higher weighting to those five stocks than does the S&P 500, it's no surprise it has delivered a better return in 2024.

Outside of its top five positions, the ETF holds several other strong-performing stocks in the AI space, including Tesla, Alphabet, and Broadcom.

But it isn't all about tech. Stocks like Eli Lilly, Visa, Costco Wholesale, and McDonald's are among the top 20 holdings in the ETF.

The Vanguard ETF is Poised to Outperform the S&P 500 Again in 2025

Since its inception in 2004, the Vanguard ETF has achieved a compound annual return of 11.4%, surpassing the S&P 500's average annual return of 10.1% over the same period.

This outperformance has intensified over the past decade, with the Vanguard ETF delivering a compound annual return of 15.2%, compared to the S&P's 13.2% average annual gain.

If AI stocks continue to drive the market upward in 2025, the Vanguard ETF is likely to outperform the S&P 500 once more, given their substantial representation in its portfolio. However, a market correction could alter this trajectory, as investors tend to shift away from momentum stocks in favor of safer dividend-paying options during such times.

The S&P 500 is currently not inexpensive, with a price-to-earnings (P/E) ratio of 24.7, which is approximately 36% above its long-term average of 18.1 since the 1950s. This premium is largely driven by growth stocks; for instance, each of the Vanguard ETF's top five holdings has a higher P/E ratio than that of the S&P.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.