VUG

The S&P 500 Is a Great Option, but History Says This ETF May Be a Better Choice

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 S&P 500 fund 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 (NYSEMKT: VUG). 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 Chart

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.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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