Prediction: This Unstoppable Vanguard ETF Will Beat the S&P 500 Again in 2025 todayheadline

Apple, Nvidia, and Microsoft are the world’s three largest companies, with a combined value of $10 trillion. Each operates in the information technology sector, which is responsible for developing the hardware and software that powers everything from the internet to personal computers.

The S&P 500 delivered a return of 23% last year. Had you invested in the Vanguard Information Technology ETF (VGT -2.71%), you would have earned a gain of 29% instead.

But last year wasn’t a one-off. The exchange-traded fund (ETF) has outperformed the S&P 500 on average every year since its establishment in 2004. Here’s why I predict it will crush the index yet again in 2025.

44% of this ETF is invested in Apple, Nvidia, and Microsoft

The Vanguard ETF breaks the information technology sector down into 12 segments, including semiconductors, systems software, technology hardware, and application software. The semiconductor segment is the largest, representing 27% of the total value of the ETF.

That is unsurprising, given that since the start of 2023, Nvidia has added over $3 trillion to its market capitalization on the back of surging demand for its artificial intelligence (AI) data center chips. Chipmaker Broadcom also entered the trillion-dollar club last year thanks to a triple-digit percentage gain in its stock.

Despite holding 316 different stocks, Apple, Nvidia, and Microsoft account for 44% of the entire value of the Vanguard ETF. Moreover, its top 10 holdings feature some of the biggest names in the AI space right now:

Data source: Vanguard. Portfolio weightings are accurate as of Jan. 31, 2025, and are subject to change. ETF = exchange-traded fund.

The above 10 stocks generated an average return of 50.8% during 2024, which is a big reason the Vanguard ETF outperformed the S&P 500 so comfortably:

NVDA data by YCharts.

Apple recently launched its Apple Intelligence software for all new iPhones, iPads, and Mac computers. It introduced several AI-powered features that transform how users manage their notifications and even create and consume content. Plus, thanks to an integration with OpenAI’s ChatGPT application, Apple’s Siri voice assistant is now more powerful than ever.

According to a report by veteran Apple analyst Ming-Chi Kuo, the company might also be working on a humanoid robot. It could be an enormous opportunity as robotics is slated to become an extremely valuable subsegment of the AI industry.

For now, Nvidia remains the AI hardware king thanks to its graphics processing units (GPUs) for the data center. The company is gearing up to ship commercial quantities of its latest Blackwell GPUs this year, which are best in class for AI development. Microsoft and Oracle could be among the biggest buyers of those chips, as they both operate centralized data centers they rent to AI developers.

Vanguard is known for offering the cheapest ETFs in the industry. This one has just a 0.09% expense ratio, which is the portion of the fund deducted each year to cover management costs. That means an investment of $10,000 in the Vanguard Information Technology ETF would incur an annual fee of just $9. That sounds like a great deal, considering its quality holdings and strong returns.

The Vanguard ETF can beat the S&P 500 again in 2025

As I mentioned at the top, the Vanguard ETF is no stranger to beating the S&P 500. It has delivered a compound annual return of 13.6% since its inception in 2004, comfortably outperforming the average annual gain of 10.4% in the index over the same period.

The magic of compounding is incredibly powerful, so here’s what that difference means in dollar terms:

Calculations by author.

AI will likely drive further upside in some of the biggest holdings in the Vanguard ETF. For example, Microsoft, Amazon, Meta Platforms, and Alphabet have committed to spending hundreds of billions of dollars (combined) on AI data center infrastructure and chips during 2025, and a lot of that money will flow to companies like Nvidia and Broadcom.

Moreover, Microsoft and Oracle are both experiencing more demand for their AI data centers than they can possibly supply right now, which should continue to buoy their cloud revenue and earnings growth.

Finally, as new Apple Intelligence features continue to roll out, the software could drive a major upgrade cycle for the iPhone and other Apple devices in 2025. It might be what the company needs to reignite its revenue growth, which has been sluggish over the last few years.

With all that said, the AI revolution is still in its very early stages. It’s never a good idea for investors to put all their eggs in one basket, so even though this Vanguard ETF has a great chance to beat the S&P 500 yet again in 2025, they should buy it only as part of a diversified portfolio of other funds or individual stocks.