Prediction: Vanguard’s Best-Performing ETFs in 2024 Will Continue to Outperform the S&P 500 in 2025

purchase S&P 500 Index funds are a great way to achieve diversification and invest in the growth of the U.S. economy. However, some investors may prefer to invest in a mix of individual stocks and exchange-traded funds (ETFs) in companies they believe can help them achieve their investment goals. This allows you to fuel passive income streams or bet on specific themes or sectors. , or trying to outperform the S&P 500.

Vanguard offers more than 85 low-cost ETFs for stocks, bonds, and a mix. The best performing ETFs to date are: electric potential S&P 500 Growth ETF (VOL 0.55%) — It’s up 29.2% so far in 2024, while the S&P 500 is up 21.9%. Here’s why ETFs could beat the market again in 2025 and why they’re worth buying and holding for the long term.

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Bet on the biggest and best growth stocks

Growth investing prioritizes the potential for future earnings and cash flow, while value investing focuses on what the company produces today.

The Vanguard S&P 500 Growth ETF, which holds 231 stocks, essentially splits the S&P 500 in half and targets the companies with the highest growth rates, regardless of valuation. This strategy is effective if the company achieves revenue growth, but can backfire if actual results do not meet expectations.

The Vanguard S&P 500 Growth ETF holds a whopping 59.7% of the top 10 stocks. apologize, microsoft, nvidia, alphabet, meta platform, Amazon, ellie lily, Broadcom, teslaand netflix. one side, Vanguard S&P 500 ETF The proportion of the same 10 stocks is only 34.3%. Given that many of these companies were market-beating stocks in 2024, it makes sense for the Vanguard S&P 500 Growth ETF to outperform the S&P 500.

To continue to beat the market, these companies must demonstrate that they can grow earnings faster than the market average and justify their higher valuations.

Understanding Growth Stock Valuation

The following chart shows the future earnings multiples for these 10 companies based on analyst estimates for the next 12 months. Aside from Alphabet, none of these stocks look particularly cheap. But context is important.

TSLA PE Ratio (Forward) data from YCharts.

For example, let’s look at meta-platforms. Meta is spending huge amounts of money on research and development, from purchasing artificial intelligence (AI)-based Nvidia chips to experimenting with virtual reality and the Metaverse. Meta can easily dismantle these investments and increase short-term returns, making the stock appear cheaper.

The same goes for Nvidia, which has been able to slow down its innovation rate to increase profitability. Instead, we decided to invest in a new chip that could deliver unparalleled efficiency and cost savings to our customers.

Amazon is known to place more emphasis on revenue growth than profit growth. If you don’t reinvest a large portion of your cash flow into the business, it can easily become a very profitable and inexpensive company.

One of the reasons these companies have high valuations is because investors are pricing their stock prices high. But another, more important factor is that these companies are not focused on generating as much revenue as possible right now, but rather on charting a path toward future growth at the expense of short-term results.

For this strategy to work well over time, companies must allocate capital to projects that generate a return on investment. If a company starts spending money on bad ideas, it will quickly collapse.

Reasonably balanced growth ETF

What makes the Vanguard S&P 500 Growth ETF different from other growth funds is that it includes many traditional “value” stocks, such as: Procter & Gamble, Merck, coke, Pepsicoand mcdonaldsAs well as fast-growing companies in non-tech focused sectors. UnitedHealth and costco wholesale. These companies don’t have nearly the growth potential of innovative technology stocks like Nvidia, but they do have a track record of generating consistent earnings growth over time. Investors are willing to pay higher multiples for stocks like P&G compared to their peers. Because P&G is a high-margin, well-run company that does a great job of developing top brands.

About 60% of the Vanguard S&P 500 Growth ETF is in the top 10 stocks, and the remaining 40% of the fund is fairly balanced across companies from a variety of sectors. Overall, the Vanguard S&P 500 Growth ETF has a price-to-earnings ratio (P/E) of 32.9, compared to 29.1 for the Vanguard S&P 500 ETF. So it’s not that expensive, especially when compared to ETFs that focus on ultra-high growth. Vanguard Mega Cap Growth ETFIt has small holdings and high weighting in a small number of companies.

Think Long-Term with the Vanguard S&P 500 Growth ETF

With an expense ratio of just 0.1%, the Vanguard S&P 500 Growth ETF gives investors an inexpensive way to target hundreds of top growth stocks without incurring high fees.

Focusing on high-quality businesses that grow returns is a way to outperform other funds or indices with fewer quality names. However, it is important to understand that the stock market can do anything in the short term.

If near-term results disappoint or investor sentiment turns negative, companies whose valuations are based on future growth are more likely to be sold than companies whose valuations are fairly based on current earnings.

That’s why it’s important to approach the Vanguard S&P 500 Growth ETF with a long-term mindset and the understanding that even the best companies experience extreme sell-offs.