The S&P 500 is having a strong year in 2025, but investors owning the Vanguard Growth ETF are doing even better.
This exchange-traded fund invests aggressively in America’s largest 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 because of its unique investment strategy.
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The S&P 500 (SNPINDEX: ^GSPC) It has had a strong year to date with a gain of 16.1%, well above the average annual return of 10.5% since inception in 1957. However, investors bought in. Vanguard Growth ETF (NYSEMKT: VUG ) Earlier this year, they are sitting on a very good return of 19.2%.
This exchange-traded fund (ETF) has actually outperformed the S&P 500 every year since its inception in 2004, largely because it typically invests more aggressively in higher-yielding stocks. Names like Nvidia (NASDAQ: NVDA ), Microsoftand Amazon These are just a few examples.
Here’s why I think those stocks will drive the Vanguard Growth ETF to another market-beating return in 2026.
Vanguard tracks the growth ETF CRSP US Large Cap Growth The index, which invests in the top 85% of US companies CRSP US Total Market Index by price. In other words, if we ranked all 3,498 stocks in the total market index in order of their size, the CRSP US Large Cap Growth Index would start at the top and invest in each company on the list until it captured 85% of their combined value.
Here’s the interesting part: The Vanguard Growth ETF only holds 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, which means the remaining 15% of value is spread across the other 3,338 companies. This actually highlights the extreme concentration of wealth in the corporate sector, and technologies such as artificial intelligence (AI) are widening this gap.
The top five holdings in the Vanguard ETF have a combined market capitalization of $18 trillion, and each of them plays a leading role in the AI race. Below is their individual weighting in the Vanguard ETF relative to their weighting in the S&P 500:
| Stock | Vanguard ETF Portfolio Weights | S&P 500 weight |
|---|---|---|
| 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 October 31, 2025, and are subject to change.
Nvidia stock alone has returned 1,130% since the AI boom took off in early 2023. Any fund or index with higher exposure will outperform one with lower exposure for returns of that magnitude, so it’s no surprise that the Vanguard ETF is beating the S&P 500.
Nvidia is heading into 2026 with demand for its industry-leading AI data center chips likely exceeding 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 are entering the new year with revenue growth in their respective cloud divisions. They buy Nvidia’s chips and lease the computing capacity to other businesses, who use it to develop and deploy their own AI software. If these three companies maintain their recent momentum next year, they could contribute significant returns to the Vanguard ETF.
Although the ETF is very tech-heavy, it offers some diversification. Like non-technology stocks Visa, MasterCard, Costco Wholesaleand McDonald’s Its top 20 holdings are scattered among.
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 risen an average of 10.4% per year over the same period.
The CRSP US Large Cap Growth Index (and by extension, the Vanguard ETF) is rebalanced once per quarter, removing any stocks that no longer meet the criteria in favor of better candidates. This is the secret of its strong returns; By holding only 160 of the top quality U.S. growth stocks, it doesn’t have exposure to some of the weakest performers in the S&P 500, which can sometimes yield very poor — or even negative — returns.
For example, the slow-growth utilities sector Vanguard ETF has just a 0.1% weighting, while it makes up 2.3% of the S&P 500. A similar disparity holds for the energy sector.
The technology industry is likely to continue driving the broader market higher in 2026, mainly thanks to AI. Earlier this month, Nvidia CEO Jensen Huang said data center operators could spend $4 trillion annually on AI infrastructure by 2030, meaning increasing amounts could flow to suppliers of chips and networking equipment each year until then.
If that’s the case, 2026 looks very similar to 2025 in terms of stock market returns, meaning the Vanguard ETF could beat the S&P 500 once again.
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Anthony Di Pizio has no positions in any of the stocks mentioned. The Motley Fool has and recommends positions in Alphabet, Amazon, Apple, Costco Wholesale, Mastercard, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. Motley Fool has a disclosure policy.
Prediction: This Unstoppable Vanguard ETF Will Crush the S&P 500 (Again) in 2026 was originally published by The Motley Fool.
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