Looking to Beat the S&P 500? This Vanguard ETF Could Do the Trick

The U.S. stock market has a handful of key benchmarks, but none are as followed or important as the S&P 500. Tracking the largest 500 American companies on the U.S. stock exchanges, it’s essentially the benchmark of the stock market by most accounts.

When stocks or exchange-traded funds (ETFs) track their performance and judge their returns, they typically measure it against the S&P 500. If your returns are greater, you’re generally in good shape; if they’re lower, it’s generally considered an underperformance.

If you’re looking for an ETF with a history of falling into the former category, the Vanguard Growth ETF (VUG -2.18%) fits the bill.

This ETF shows that large caps and growth can coexist

As the name suggests, this ETF focuses on growth stocks. But not just any growth stocks; large-cap growth stocks. That’s important because the size of the companies in this ETF provides benefits you don’t typically see with smaller growth stocks.

You may think of growth stocks as young, recently IPO’d companies, but that isn’t always the case. A growth stock is any stock with fast-growing financials (relative to their industry) and market-beating potential. Its size is irrelevant.

By focusing on large-cap growth stocks, this ETF lets you invest in companies with solid financials and proven business models while also putting you in a position to outperform the market (based on S&P 500 returns). It’s the best of both worlds.

A history of outperforming the S&P 500

Since this ETF was created in January 2004, here’s how its returns have stacked up against the S&P 500.

VUG Total Return Level data by YCharts

It’s one thing for an ETF to say its focus is outperforming the market. It’s a different feel when the ETF actually has a history of doing it. With two decades under its belt, this ETF has earned the trust of investors seeking market-beating returns.

Of course, just because it has happened doesn’t mean it’ll continue to happen, but this ETF is equipped to keep its momentum going for the foreseeable future. It’s heavily weighted in the tech sector (57.7% of the ETF), so that should be the catalyst for a lot of its growth — or lack thereof. With the emergence of artificial intelligence, the explosion of the cloud industry, increased demand for cybersecurity, and other new developments, the tech industry has plenty of growth opportunities.

Although it’s skewed toward the tech sector, the ETF also contains companies from the other 10 major sectors that can help pick up some slack if need be.

Source: Vanguard. Percentages as of Sept. 30.

As the top three holdings go, so goes the ETF

This ETF has many great aspects. The one (slight) downside, however, is the concentration of its top holdings. Below are the ETF’s top 10 holdings and how much of the ETF they make up:

Source: Vanguard. Holdings as of Sept. 30.

The top 10 holdings make up over 57% of the ETF; the S&P 500’s top 10 holdings make up just over 34%. However, the top 10 isn’t what I want to focus on. The focus should be on Apple, Microsoft, and Nvidia making up around a third of a 183-stock ETF.

In all fairness, those are three world-class companies, each with a history of market-beating returns. That’s great when things are going well, but when they’re not, it can get ugly. Let’s take 2022, for example, when many large-cap growth stocks experienced a sharp sell-off.

VUG data by YCharts

Because of the concentration, this ETF shouldn’t be the foundation of most portfolios, but it can be a great supplement, enabling investors to take advantage of high-flying tech stocks.