In 2024, the Standard and Poor’s 500 (S&P 500) index provided a 25% return.
By press time on February 4, the index had reached a level of 5,994, having rallied by 1.92% since the start of the year. The Street high estimate sees the index reaching 7,100 in 2025 — a mark that would equate to an 18.45% increase from current levels.
Investing in a broad index fund that tracks the S&P 500 isn’t a bad move by any stretch of the imagination.
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You’re guaranteed a huge degree of diversification — but there’s a drawback. Let’s face it — 500 stocks is a lot of stocks. Sure, there are going to be a lot of winners caught in that wide net — but on the whole, the performance of your portfolio will also be weighed down by a ton of underperformers.
Leaning specifically into growth stocks could be the antidote to this, however. Vanguard, the second-largest provider of exchange-traded funds (ETFs) behind BlackRock (NYSE: BLK) offers a variety of investment vehicles — but one in particular has shown a promising track record when it comes to beating the S&P 500 in recent years.
The Vanguard S&P 500 Growth ETF (NYSEARCA: VOOG) tracks the smaller S&P 500 Growth index. VOOG has less than half the holdings the S&P 500 does — 208, to be exact. These holdings are selected based on three criteria — sales growth, the ratio of earnings change to price, and momentum.
Why this Vanguard ETF can successfully capture growth in 2025
VOOG was established back in 2010. Since then, it has provided a compound annual growth rate (CAGR) of 16.3%. In contrast, the S&P delivered a CAGR of 14.1% in the same timeframe.
While the 2.2% differential doesn’t sound like much, compound interest does make it significant. Investing $50,000 in a wider market fund as well as VOOG 10 years ago would have secured vastly different gains. The wider market fund would now be worth roughly $186,993 — while the investment made in VOOG would be worth approximately $226,343. That’s $39,350 right there — far from a sum that one can scoff at.
There’s quite a simple explanation — with less than half the holdings of the S&P 500, VOOG is much more heavily weighed toward big winners in the tech sector — think Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), or Microsoft (NASDAQ: MSFT).
In fact, the three companies we’ve just mentioned account for more than a quarter of the fund’s holdings. If we expand our view to include Meta (NASDAQ: META), Amazon (NASDAQ: AMZN), and Tesla (NASDAQ: TSLA), we’ve accounted for 39.63% of the fund’s holdings.
At present, there is no narrative or trend in the markets as dominant as artificial intelligence is — and this Vanguard ETF is well-poised to capture that growth while also providing investors with a significant degree of diversification through exposure to other sectors like consumer discretionary and healthcare.
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