The LS&P 500 is having a strong year in 2025, but investors holding the Vanguard Growth ETF are doing even better.
This exchange-traded fund invests aggressively in some of America’s biggest growth stocks, which typically outperform the rest of the market.
The Vanguard Growth ETF is likely to beat the S&P 500 again in 2026 due to its unique investment strategy.
10 stocks we like better than Vanguard Index Funds – Vanguard Growth ETF ›
the S&P 500 (SNPINDEX: ^GSPC) it is having a strong year to date with a return of 16.1% year to date, which is well above its average annual return of 10.5% since it was established in 1957. However, if investors bought the Vanguard Growth ETF(NYSEMKT: VUG) at the beginning of this year instead, they are on a much better return of 19.2%.
This exchange-traded fund (ETF) has actually outperformed the S&P 500 every year since its inception in 2004, mainly because it invests more aggressively in stocks that typically yield the highest returns. Names like Nvidia(NASDAQ: NVDA), Microsoftand Amazon are just a few examples.
Here’s why I think those stocks will lead the Vanguard Growth ETF to another market-beating return in 2026.
Image source: Getty Images.
The Vanguard Growth ETF tracks the CRSP US Large Cap Growth index, which invests in the top 85% of US companies in CRSP Total US market index by value. In other words, if we rank all 3,498 stocks in the Total Market index in order of their size, the CRSP US Large Cap Growth index starts at the top and invests in each company on the list until it captures 85% of their combined value.
Here’s the interesting part: The Vanguard Growth ETF only has 160 stocks. That’s right, the top 160 listed US companies account for 85% of the entire value of all 3,498 companies in the Total Market index, meaning the remaining 15% of value is spread over the other 3,338 companies. This really highlights the extreme concentration of wealth in the corporate sector, and technologies like artificial intelligence (AI) are widening the gap even further.
The top five holdings in the Vanguard ETF have a combined market capitalization of $18 trillion, and each of them plays a major role in the AI race. Below their individual weighting in the Vanguard ETF relative to their weighting in the S&P 500:
Stock
Vanguard ETF Portfolio Weighting
S&P 500 Weighting
1. Nvidia
12.53%
8.46%
2. Apple
10.68%
6.87%
3. Microsoft
10.28%
6.59%
4. Alphabet
7.52%
5.05%
5. Amazon
5.93%
4.06%
Data source: Vanguard. Portfolio weights are accurate as of 31 October 2025, and are subject to change.
As the AI boom began gathering momentum in early 2023, Nvidia stock alone delivered a staggering 1,130% return. Any fund or index with high exposure to returns of that magnitude will beat one with less exposure, so it’s no surprise that the Vanguard ETF is beating the S&P 500.
Nvidia heads into 2026 with more demand for its industry-leading AI data center chips than it can possibly supply, which should fuel another strong year of revenue and earnings growth for the company.
Microsoft, Alphabet, and Amazon are among Nvidia’s top customers, and they’re heading into the new year with accelerating revenue growth in their respective cloud divisions. They buy Nvidia chips and lease computing capacity to other businesses, which use it to develop and deploy their own AI software. If these three companies maintain their recent momentum next year, they could contribute to significant gains in the Vanguard ETF.
Although the ETF is very technology heavy, it offers some diversification. Similar non-technology stocks Visa, Mastercard, Costco Wholesaleand McDonald’s they are scattered among its top 20 holdings.
The Vanguard Growth ETF has produced a compound annual return of 12.2% since its inception in 2004, so it has comfortably outperformed the S&P 500 which has grown by an average of 10.4% per year over the same period.
The CRSP US Large Cap Growth index (and by extension, the Vanguard ETF) rebalances quarterly, eliminating any stocks that no longer meet its criteria in favor of better candidates. This is the secret to his strong earnings; by holding only 160 of the highest quality US growth stocks, it lacks exposure to some of the poor performers in the S&P 500 that can sometimes deliver much weaker — or even negative — returns.
For example, the slow-growing utilities sector has only a 0.1% weighting in the Vanguard ETF, while it accounts for 2.3% of the S&P 500. There is a similar disparity for the energy sector.
The technology industry is likely to continue to lead the broader market higher in 2026, mainly thanks to AI. Earlier this month, Nvidia CEO Jensen Huang said data center operators could spend a staggering $4 trillion a year on AI infrastructure by 2030, meaning an ever-increasing amount of money could flow to chip and networking equipment suppliers every year until then.
If that’s the case, 2026 could look very similar to 2025 in terms of stock market returns, meaning the Vanguard ETF is likely to beat the S&P 500 once again.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Mastercard, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends the following options: $395 long January 2026 Microsoft calls and $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.
Prediction: This Vanguard Unstoppable ETF Will Crush the S&P 500 (Forever) in 2026 was originally published by The Motley Fool
