The S&P 500(SNPINDEX: ^GSPC) is having a really robust 12 months, with a 27.3% achieve to date. That is greater than twice its common annual return going all the way in which again to 1957.
Nonetheless, the Vanguard Progress ETF(NYSEMKT: VUG) is performing even higher, with a 30.9% year-to-date achieve. That is as a result of expertise shares are main the S&P larger in 2024 due to traits like synthetic intelligence (AI), and this Vanguard exchange-traded fund (ETF) assigns them a a lot larger weighting.
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The Vanguard ETF really has a powerful observe report with regards to outperforming the S&P 500, beating the index yearly (on common) because it was established in 2004.
The expertise sector is more likely to proceed main the broader market larger, so this is why I predict the Vanguard ETF will beat the S&P 500 but once more in 2025.
Picture supply: Getty Photographs.
The Vanguard ETF invests solely in U.S. large-cap progress firms. It holds 182 shares from 12 completely different sectors, however the tech sector represents the biggest chunk of its portfolio by far, with a weighting of 58%.
By comparability, the S&P 500 is house to 500 completely different firms, and the expertise sector accounts for 31.7% of its portfolio. Which means the Vanguard ETF is way extra concentrated, which may result in some further threat in periods when tech shares are underperforming.
The highest three holdings within the Vanguard ETF are within the expertise sector, and so they account for over one-third of the worth of its whole portfolio on their very own. Its prime 5 holdings are rounded out by Amazon (which is within the shopper discretionary sector) and Meta Platforms (which is within the communication companies sector). Their particular person weightings relative to the S&P 500 are beneath:
Inventory
Vanguard ETF Weighting
S&P 500 Weighting
1. Apple
11.71%
7.11%
2. Nvidia
10.94%
6.76%
3. Microsoft
10.80%
6.26%
4. Amazon
6.00%
3.61%
5. Meta Platforms
4.70%
2.57%
Knowledge supply: Vanguard. Portfolio weightings are correct as of Oct. 31, 2024, and are topic to alter.
These 5 firms function on the forefront of the AI revolution, dominating each the {hardware} and software program sides of this rising trade. Their shares have delivered a mean return of just about 61% in 2024, led by Nvidia, which has soared by 173% due to unbelievable demand for its AI knowledge middle chips:
Because the Vanguard ETF assigns the next weighting to these 5 shares than does the S&P 500, it is no shock it has delivered a greater return in 2024.
Outdoors of its prime 5 positions, the ETF holds a number of different strong-performing shares within the AI area, together with Tesla, Alphabet, and Broadcom.
But it surely is not all about tech. Shares like Eli Lilly, Visa, Costco Wholesale, and McDonald’s are among the many prime 20 holdings within the ETF.
The Vanguard ETF has delivered a compound annual return of 11.4% since its inception in 2004, which is best than the ten.1% common annual return within the S&P 500 over the identical interval.
That outperformance accelerated during the last 10 years, with the Vanguard ETF delivering a compound annual return of 15.2%, in comparison with a 13.2% common annual achieve within the S&P.
If AI shares proceed to steer the market larger in 2025, the Vanguard ETF should not have any drawback outperforming the S&P 500 but once more since they characterize such a big portion of its portfolio. Nonetheless, a market correction might shake issues up as a result of that is when traders draw back from momentum-driven shares and flock to safer dividend payers as an alternative.
The Vanguard Progress ETF persistently performs higher than the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG). However wanting on the beneath chart, the Progress ETF suffers a lot steeper declines throughout turbulent intervals, which means progress shares might simply underperform dividend shares throughout any single 12 months of broader market weak spot:
The S&P 500 is not low cost proper now. Its price-to-earnings (P/E) ratio of 24.7 is round 36% larger than its long-term common of 18.1 going again to the Fifties. Progress shares are chargeable for most of that premium — every of the Vanguard ETF’s prime 5 holdings, for instance, trades at the next P/E ratio than the S&P.
Consequently, I can not rule out the potential for a correction sooner or later in 2025. Nonetheless, so long as the U.S. economic system stays robust, it can more than likely be a short-lived shopping for alternative with progress shares bouncing again to steer the market larger as soon as once more.
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John Mackey, former CEO of Complete Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an govt at Alphabet, is a member of The Motley Idiot’s board of administrators. Anthony Di Pizio has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Microsoft, Nvidia, Tesla, Vanguard Dividend Appreciation ETF, Vanguard Index Funds-Vanguard Progress ETF, and Visa. The Motley Idiot recommends Broadcom and recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
