This ETF can provide market-beating potential and relative stability because of the size of its holdings.
Stock market indexes are formed by grouping companies according to specific criteria -- and they are often used as comparison points for an investor's own portfolio.
The most popular and important index is the S&P 500, which tracks the largest 500 public U.S. companies. When it comes to benchmarks, the S&P 500 is the benchmark. Given the size and diversity of the companies the S&P 500 tracks, it's often used to gauge the health of the U.S. economy, and investing in an is akin to investing in the broader U.S. economy.
Despite how great of an investment option the S&P 500 is, one ETF has historically been a better investment: the Vanguard Growth ETF (VUG -0.23%). Let's see why -- and whether it might make a sensible investment now.
So, what is the Vanguard Growth ETF?
The Vanguard Growth ETF is a large-cap fund focusing on companies with above-average growth potential (hence the name). It's a great way to get the best of both worlds in stock investing.
On one end, you get exposure to companies in a position to produce market-beating returns. On the other end, the large size of these companies means they're generally more well established and can help provide more stability during rockier times in the stock market. For perspective, the smallest company in the ETF, Liberty Broadband, has a market cap of around $7.1 billion.
Having larger companies in the ETF is beneficial because many growth stocks are known for being more volatile due to their valuations being built on potential. Although larger companies can also be valued on potential, you don't typically get to their sizes without establishing a good market position.
Guided by some of the world's greatest companies
Since the Vanguard Growth ETF and S&P 500 focus on large-cap companies, there is a good amount of overlap between them, although the former typically only contains around 200 stocks. Below are overlapping companies from the top 10 holdings of the Vanguard Growth ETF and Vanguard S&P 500 ETF and how much of the ETFs they account for:
| Company | Percentage of Vanguard Growth ETF | Percentage of Vanguard S&P 500 ETF |
|---|
| Microsoft | 12.96% | 7.08% |
| Apple | 10.42% | 5.63% |
| NVIDIA | 8.88% | 5.05% |
| Amazon | 6.97% | 3.73% |
| Meta Platforms | 4.45% | 2.42% |
| Alphabet Class A | 3.67% | 2.01% |
| Alphabet Class C | 3.03% | 1.70% |
| Eli Lilly & Co. | 2.77% | 1.40% |
Sources: Vanguard. Percentages as of March 31.
Having 10 companies account for close to 57% of an ETF (Visa is 1.78%) sn't a billboard for diversification, but it makes sense given that the Vanguard Growth ETF is market cap-weighted, and many of the top growth companies we've seen explode in value over the past decade or so have been tech companies.
The tech sector makes up over 56% of the Vanguard Growth ETF, so it's not quite the one-stop shop that an S&P 500 ETF is, but it can be a foundational part of a portfolio that investors complement with other sector-specific ETFs or companies.
Consistently outperforming the U.S. stock market
Regardless of the similarities or differences between the Vanguard Growth ETF and the S&P 500, the results matter most. A one-time $10,000 investment in the Vanguard Growth ETF at its January 2004 inception would be worth just under $79,500 today. The same investment in an S&P 500 ETF would be worth around $64,000 (not including fees in both cases).
While the Vanguard Growth ETF has outperformed the S&P 500 in that span (9.6% to 7.5% average annual returns), the difference has been even more pronounced in the past decade, when growth stocks have soared.
VUG Total Return Level data by YCharts.
The difference between the Vanguard Growth ETF and the S&P 500 is smaller when examining total returns, but this can be attributed to the S&P 500 including dividend stocks that don't fit the Vanguard Growth ETF growth criteria.
You never want to use past results to predict future performance, but given the overlap of companies and current market trends (especially in tech), the Vanguard Growth ETF is in a great position to continue producing long-term market-beating returns.
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 to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Stefon Walters has positions in Apple, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, Vanguard S&P 500 ETF, and Visa. The Motley Fool recommends Liberty Broadband and 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.
FAQs
Despite how great of an investment option the S&P 500 is, one ETF has historically been a better investment: the Vanguard Growth ETF (VUG 0.48%).
What is better, S&P 500 index fund or ETF? ›
The Bottom Line. Both index mutual funds and ETFs can provide investors with broad, diversified exposure to the stock market, making them good long-term investments suitable for most investors. ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges.
What is the best ETF that follows the S&P 500? ›
What's the best S&P 500 ETF?
| ETF | Ticker | Annualized 5-year return |
|---|
| iShares Core S&P 500 ETF | IVV | 15.01% |
| SPDR S&P 500 ETF Trust | SPY | 14.14% |
| Vanguard S&P 500 ETF | VOO | 13.15% |
May 1, 2024
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Is the S&P 500 equal weight ETF better than the S&P 500? ›
The S&P 500, which is market-cap weighted, is about 26% more expensive than its average valuation of 16.2x back since 2009, while the S&P 500 equal weight is only 5% more expensive. From a valuation perspective, there may be more room to run for a broader set of stocks.
Which is better, index or ETF? ›
ETFs are known to be traded in mostly intraday shares via AMCs and can give higher profits. Index Funds are known to trade primarily in securities via AMCs and offer more security in investment. In comparison to index fund vs etf, ETFs are a much riskier form of investment than Index Funds.
Should I keep buying S&P 500 index fund? ›
One important thing for all investors to learn is that timing the market is impossible. And quite frankly, it's unimportant if you're investing in a high-quality S&P 500 index fund for the long term. Even if you buy at a market peak, your long-term returns should likely be excellent.
What is the cheapest ETF for the S&P 500? ›
100 Lowest Expense Ratio ETFs – Cheapest ETFs
| Symbol | Name | Expense Ratio |
|---|
| SPLG | SPDR Portfolio S&P 500 ETF | 0.02% |
| BBUS | JPMorgan BetaBuilders U.S. Equity ETF | 0.02% |
| BND | Vanguard Total Bond Market ETF | 0.03% |
| AGG | iShares Core U.S. Aggregate Bond ETF | 0.03% |
96 more rowsTop S&P 500 index funds in 2024
| Fund (ticker) | 5-year annual returns | Expense ratio |
|---|
| Source: Morningstar, as of April 4, 2024 |
| Fidelity ZERO Large Cap Index (FNILX) | 14.6% | 0% |
| Vanguard S&P 500 ETF (VOO) | 14.5% | 0.03% |
| SPDR S&P 500 ETF Trust (SPY) | 14.5% | 0.095% |
4 more rowsApr 5, 2024
SPY was created on January 22, 1993. It was the first US ETF to be listed on a national stock exchange, and it remains the most widely traded ETF in the world.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
How risky is S&P500? ›
The S&P 500 carries market risk, as its value fluctuates with overall market performance, as well as the performance of heavily weighted stocks and sectors. For example, the technology sector performed poorly in 2022 and was a large contributor to the index's correction that year.
How are ETFs risky? ›
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
What is the 20 year return of the S&P 500? ›
The historical average yearly return of the S&P 500 is 9.88% over the last 20 years, as of the end of April 2024. This assumes dividends are reinvested. Adjusted for inflation, the 20-year average stock market return (including dividends) is 7.13%.
Is there anything better than the S&P 500? ›
The S&P 500's track record is impressive, but the Vanguard Growth ETF has outperformed it. The Vanguard Growth ETF leans heavily toward tech businesses that exhibit faster revenue and earnings gains. No matter what investments you choose, it's always smart to keep a long-term mindset.
Should I invest in ETF or S&P 500? ›
A well-diversified ETF such as one based on the S&P 500 can beat most investors over time, making it easy for regular investors to do well in the market. ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much.
What is the best way to invest in the S&P 500? ›
The easiest and most efficient way to invest in the S&P 500 is via a low-cost exchange-traded fund (ETF). Several ETFs track the S&P 500, but the oldest and most popular is the SPDR S&P 500 ETF Trust (SPY). SPY was the first ETF to hit the US market in January 1993 and is now the world's most heavily traded ETF.
Should I have both index fund and ETF? ›
Investing in both index funds and ETFs can be beneficial, as they offer different advantages. While there may be some overlap in the investments they hold, there can still be value in holding both.
Why is ETF cheaper than index? ›
For most investors, ETF trades take place with other investors, and not with the fund company itself. That means the fund company doesn't have to process your order; doesn't have to mail you the same documents; and doesn't have to go into the market to process your order. Less work = lower costs.
Should I invest more in stocks or ETFs? ›
Advantages of investing in ETFs
A well-diversified ETF such as one based on the S&P 500 can beat most investors over time, making it easy for regular investors to do well in the market. ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much.
