Prediction: This Spectacular Vanguard ETF Will Crush the S&P 500 Again in 2025

The S&P 500 (SNPINDEX: ^GSPC) delivered a return of 23% in 2024, which was more than double its average annual gain dating back to when it was established in 1957. However, had you invested in the Vanguard Information Technology ETF (NYSEMKT: VGT) instead, you would have earned a return of 32% for the year.

This exchange-traded fund (ETF) holds 316 different technology stocks, including some of the trillion-dollar giants that are powering the S&P 500 higher thanks to emerging trends like artificial intelligence (AI).

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But the ETF is no stranger to outperforming the S&P -- it has beaten the index every single year (on average) since it was established in 2004. Here's why I predict it will extend that winning run in 2025.

Image source: Getty Images.

Top AI hardware and software stocks packed into one ETF

The Vanguard ETF breaks the information technology sector down into 12 different segments, including semiconductors, which has the highest weighting, accounting for 29.5% of the total value of its portfolio. That makes sense when you consider the incredible value created by suppliers of data center chips and components over the last couple of years, driven by demand from AI developers.

Nvidia stock has soared by more than 800% since the start of 2023, catapulting the company's valuation to over $3.3 trillion. Then there is Broadcom, which doubled in value during 2024 alone and is now worth $1.1 trillion.

Both Nvidia and Broadcom are among the Vanguard ETF's top five holdings. The ETF also assigns them much higher weightings than does the S&P 500:

Data source: Vanguard, State Street. Vanguard ETF portfolio weightings are accurate as of Dec. 31, 2024, and are subject to change. S&P 500 weightings accurate as of Jan. 16, 2025.

Those five stocks delivered an average return of 69.6% in 2024, so when you consider the big difference in weightings in the above table, it's no surprise the Vanguard ETF crushed the S&P 500 last year.

NVDA data by YCharts.

Since AI is still in its infancy, many of those stocks are likely to continue delivering strong returns. I think Nvidia could soar again in 2025, driven by strong sales of its new Blackwell graphics processing units (GPUs) for data centers, which are the undisputed gold standard for developing AI.

Broadcom stock is a little pricey right now, but for good reason. The company grew its AI revenue by 220% during its fiscal year 2024 (ended Nov. 3), led by surging demand for its AI accelerators (chips), data center switches, and other components. If the company continues to deliver results like that, a higher stock price is very likely.

Apple might also have a strong year as it continues to roll out its Apple Intelligence software to users of the latest iPhones, iPads, and Mac computers. Over the next few quarters, we will find out if the impressive suite of new AI-powered features enticed customers to upgrade their devices.

The Vanguard ETF holds a number of other popular AI stocks outside of its top five positions, including Oracle, Advanced Micro Devices, Palantir Technologies, Micron Technology, CrowdStrike, and more.

The Vanguard ETF has a great track record against the S&P 500

The Vanguard Information Technology ETF has delivered a compound annual return of 13.7% since it was established in 2004, far outpacing the average annual gain of 10.4% in the S&P 500 over the same period.

Although a difference of 3.3 percentage points doesn't sound like much at face value, it made a big difference in dollar terms thanks to the effects of compounding:

Calculations by author.

The companies in the Vanguard ETF are going to capture a significant amount of the value created by both AI hardware and software. According to PwC, this technology could add $15.7 trillion to the global economy by 2030, so it's the biggest financial opportunity some of those companies have ever seen.

Of course, many of the stocks in the ETF could suffer a lengthy period of underperformance if AI fails to meet those lofty expectations, which is why investors should own it as part of a diversified portfolio of other funds or individual stocks.

Had you taken $10,000 at the start of 2004 and invested 70% in an S&P 500 index fund and the other 30% in the Vanguard ETF, the combined investment would have still grown to $100,376 by the end of 2024. That might be a happy medium between the two outcomes in the table above: It balances strong returns with some protection from the downside risks posed by AI.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, CrowdStrike, Microsoft, Nvidia, Oracle, Palantir Technologies, and Salesforce. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.