This Vanguard ETF Consistently Beats the S&P 500. Here’s Why More Outperformance Is Possible.
The Vanguard S&P 500 ETF (VOO +0.08%) is one of the best investment vehicles for long-term investors. The index fund tracks the holdings of the S&P 500, a market index of the 500 largest companies in the U.S.This Vanguard ETF has a rock-bottom expense ratio of just 0.03%. That means investors pay very little in fees, allowing the vast majority of gains to be reinvested for the long haul.
The Vanguard S&P 500 ETF has been around since 2010, generating more than a decade of performance data. Since its inception, the fund has posted an average annual return of 15.03%. Over the past decade, annual returns have averaged roughly 15.47% — almost perfectly in line with the fund’s underlying benchmark.
But what if I told you that there is another Vanguard ETF with even better long-term performance? If you’re looking to invest for the long haul and are willing to accept greater short-term volatility in return for higher long-term upside potential, the index fund below is for you.
Vanguard Scottsdale Funds – Vanguard Russell 1000 Growth ETFToday’s Change(-0.79%) $-0.97Current Price$121.16Key Data PointsAUM$53BDividend Yield0.48%Expense Ratio0.06%Top HoldingsNVDA13.80%AAPL6.70%GOOGL6.16%
This Vanguard ETF could be your best long-term investment
Like the Vanguard S&P 500 Index ETF, the Vanguard Russell 1000 Growth ETF (VONG -0.79%) has been around since 2010. Its expense ratio is a bit higher at 0.06%. But overall, fees are extremely minimal compared to those of many other competing ETFs.
Since its inception, the Vanguard Russell 1000 Growth ETF has posted average annual returns of 16.84% — more than 1 full percentage point higher per year than the Vanguard S&P 500 Index ETF. Over the past decade, annual returns have averaged 18.48% — roughly 3 full percentage points higher per year than the Vanguard S&P 500 Index ETF.
Image source: Getty Images
Why have the returns of the Vanguard Russell 1000 Growth ETF consistently beaten those of the Vanguard S&P 500 Index ETF over the long term? The biggest factor in that ETF’s outperformance is its focus on growth stocks.
The Russell indexes typically track companies with various market caps. The Russell 2000 index, for example, is made up of the smallest 2,000 stocks in the Russell 3000 index, which in turn tracks the 3,000 largest publicly traded companies in the U.S. The Russell 1000 index, meanwhile, tracks the largest 1,000 stocks in the Russell 3000 index.
The Vanguard Russell 1000 Growth ETF tracks an even more specific index: the Russell 1000 Growth index. This index is a portfolio of the largest growth stocks in the U.S. It provides a rough gauge of large-cap growth stock returns.
The name of the Russell 1000 Growth index is misleading, as it includes roughly 368 holdings. Its median market cap is an astounding $1.3 trillion, and the average annual earnings growth of a holding in its portfolio is an impressive 33.7%.
Accordingly, the stocks included in the Vanguard Russell 1000 Growth ETF trade at higher valuations than those in Vanguard’s S&P 500 ETF. The fund’s holdings, for example, trade at an average price-to-earnings ratio of 36.4. The holdings of the Vanguard S&P 500 Index ETF, meanwhile, trade at an average valuation of just 27.5, with average annual earnings growth of around 23%.
Take a closer look at the holdings of the Vanguard Russell 1000 Growth ETF and you’ll quickly realize why the fund has performed so well in recent years. Nearly 70% of the fund’s holdings are tech companies, compared to just 38% for the S&P 500 ETF. At least eight out of the fund’s top 10 holdings can be considered artificial intelligence stocks. The same can be said of the S&P 500 index, but the portfolio concentration is simply much higher for the Vanguard Russell 1000 Growth ETF.
This is the big “catch” with investing in the Vanguard Russell 1000 Growth ETF. Yes, it has consistently outperformed the S&P 500 over the past decade and a half. But that performance was largely thanks to its focus on large-cap AI companies. If the AI sector ever struggles, we could see this fund’s tendency to outperform other major market indexes shift gears fast.