When discussing the stock market, the S&P 500 serves as a pivotal gauge for investors to assess overall market performance. This index tracks the 500 largest and most profitable businesses in the United States, reflecting the strength of the world’s preeminent economy. Consequently, investors closely monitor its price movements.
Historically, the S&P 500 has delivered outstanding returns, to the extent that even Warren Buffett advocates for most individuals to invest in an index fund that mirrors it. Over the past 20 years, inclusive of dividends, this broad market index has yielded an approximate annual return of 10.2%, transforming a $10,000 initial investment into $69,200.
Undoubtedly, such gains are remarkable. However, some investors may aspire for even greater returns. Achieving superior performance compared to the S&P 500 is certainly feasible. One approach is to consider investing in this exchange-traded fund (ETF) instead.
Focusing on growth businesses
Over the trailing five-, 10-, 15-, and 20-year periods, the Vanguard Growth ETF (NYSEMKT: VUG) has consistently outperformed the S&P 500, showcasing a remarkable track record. With such a compelling performance history, there’s reason to have confidence that this streak can persist in the years ahead. For instance, a $10,000 initial investment in this ETF over the last 20 years would have grown to over $88,430.
Comprised of 208 different stocks, the Vanguard Growth ETF differs from the average businesses by typically exhibiting faster top- and bottom-line growth. Over the past five years alone, the average enterprise within this fund experienced an impressive 19.6% annual earnings growth rate.
However, investors should be prepared to pay a premium for such performance. The average price-to-earnings (P/E) ratio in the Vanguard Growth ETF stands at 37.3, significantly higher than the S&P’s P/E multiple of 23.2.
Understanding the composition of this ETF is crucial. Given its focus on growth, it’s unsurprising that 55.8% of its holdings come from the technology sector, with an additional 20% from the consumer discretionary sector. These industries offer superior growth potential compared to sectors like financial services, utilities, or industrials.
Keep this in mind
In addition to considering its constituents and historical returns, investors should take note of other factors when evaluating the Vanguard Growth ETF. With an expense ratio of just 0.04%, investors stand to retain more of their returns over time. Furthermore, the reputation of Vanguard as a trusted firm with nearly five decades of experience and trillions of dollars under management can provide reassurance.
Where feasible, a standard best practice is to employ dollar-cost averaging. Consistently adding savings over time can significantly enhance returns while alleviating the need to time the market.
There’s no reason why an investor can’t hold both the Vanguard Growth ETF and an S&P 500 fund, alongside other investment vehicles targeting various objectives, within a well-rounded and diversified portfolio. It’s essential to maintain a long-term time horizon when investing, prioritizing consistency and discipline.
