Prediction: This Brilliant ETF Will Crush the S&P 500 Over the Next 30 Years
Trying to outperform the S&P 500 (^GSPC +1.79%) consistently over time is a difficult task. Over long periods, even professional managers struggle to do it. But if you can capture the right theme, maintain the discipline to ride out market volatility, and keep costs low, it is possible.
The one fund that I think has a legitimate chance to outperform the broader market over the next 30 years is the Vanguard Morningstar Growth ETF (VUG +2.31%).
How VUG captures economic growth stories
The long-term investment case for growth stocks is pretty straightforward. These are usually the companies driving the fastest earnings growth in the U.S. economy. Today, it’s artificial intelligence (AI) stocks. A decade ago, it was cybersecurity stocks. And 25 years ago, it was the internet.
Image source: Getty Images.
Even though the theme or technology changes, the Vanguard Growth ETF can evolve its portfolio to reflect what’s growing at the time. Its methodology, which considers past and forecast earnings growth rates, sales per share, and return on assets (ROA), helps ensure it targets growth stories wherever they come from.
But the growth story comes with a trade-off. These stocks often come with above-average volatility. Investors need to be comfortable with that and willing to ride out the highs and lows to give themselves the best chance of outperforming the market.
If you had been willing to do that throughout the 2000s, the returns would have been fantastic.
Data by YCharts.
Since its inception in 2004, the Vanguard Morningstar Growth ETF would have beaten the S&P 500 by a margin of 1,230% to 905%. That’s an outperformance of roughly 1.5 percentage points annually over more than 20 years.
How VUG fits into a portfolio
The Vanguard Morningstar Growth ETF isn’t designed to be a core portfolio position. Right now, roughly 70% of the portfolio is tech, and you don’t want a single sector driving your portfolio’s performance.
Today’s Change
(2.31%) $2.01
Current Price
$89.09
Key Data Points
AUM
$379B
Dividend Yield
1.77%
Expense Ratio
0.03%
Top Holdings
NVDA
12.60%
AAPL
11.64%
MSFT
7.60%
Having something like the Vanguard S&P 500 ETF (VOO +1.81%) or the Vanguard Morningstar Total Stock Market ETF (VTI +1.87%) as the foundation of your portfolio, giving a 10%-15% allocation to growth stocks can make sense. It makes more sense if you’re younger and have years, if not decades, of investing time ahead. Having time to recover from deep or prolonged downturns is key to realizing some of the potential returns growth stocks offer.
Past performance is no guarantee of future results, but it can act as a guide. A lot can happen over the course of 30 years, and we’re likely to see things that we haven’t even thought of yet. Investing in growth and innovation over time is one of the best ways to give yourself a chance to outperform the market.
David Dierking has positions in Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
