Key Points

  • The S&P 500 Growth index exclusively holds 148 of the best-performing growth stocks from the regular S&P 500 index.

  • The Growth index typically outperforms the S&P 500 over the long term due to its high exposure to the technology sector.

  • The Vanguard S&P 500 Growth ETF mimics the Growth index, and it could help young investors secure their financial future.

  • 10 stocks we like better than Vanguard Admiral Funds - Vanguard S&P 500 Growth ETF ›

The S&P 500 (SNPINDEX: ^GSPC) is made up of 500 companies from 11 different sectors of the economy, so it's highly diversified. But then there is the S&P 500 Growth index, which exclusively holds 148 of the best-performing growth stocks from the regular S&P 500, while disregarding its other 352 stocks.

As a result, the Growth index typically delivers higher returns than the S&P 500 over the long term. It can also experience more volatility, but that might be a worthwhile trade-off for young investors in their 20s, because the additional gains can lead to a far better financial position in retirement and beyond.

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The Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) is an exchange-traded fund (ETF) that mimics the Growth index, and here's why I would buy and hold it forever if I were in my 20s today.

America's top growth stocks packaged into one ETF

The S&P 500 Growth index selects stocks based on factors like their momentum, and the sales growth of the underlying companies. The Vanguard S&P 500 Growth ETF currently has over 51% of its assets parked in companies from the information technology sector, precisely because they have momentum and sales growth in spades.

In fact, four of the top five holdings in the Vanguard ETF are from the information technology sector. Those four stocks alone represent 35.6% of the value of the fund's entire portfolio.

Nvidia supplies the world's best data center chips for processing artificial intelligence (AI) training and inference workloads, and the company is forecast to grow its revenue by a whopping 90% during its current 2027 fiscal year (according to Yahoo! Finance). Broadcom has become one of Nvidia's top competitors in the data center segment thanks to its AI accelerator chips that can be customized to suit the needs of specific customers. It's forecast to grow its revenue by 65% during its current fiscal year.

Microsoft and Apple were once the fiercest of rivals, but they have taken their businesses in different directions over the last couple of decades. Microsoft is investing heavily in its Azure cloud platform, where it rents computing capacity from its state-of-the-art data centers to some of the world's most prominent AI developers. Apple, on the other hand, wants to be the biggest name in consumer AI by distributing its Apple Intelligence software to its 2.5 billion active devices around the world.

Alphabet isn't in the information technology sector, but it's still one of the most dominant companies in the AI industry. It developed a family of industry-leading models called Gemini, which it monetizes through platforms like Google Search and Google Workspace. Its Google Cloud platform is also one of the top destinations for AI developers seeking access to computing capacity and other tools and services.

Nvidia, Alphabet, Microsoft, Apple, and Broadcom have delivered a median return of 147% over the last three years, which is twice the return of the S&P 500 over the same period.

The Vanguard ETF also holds several other top AI stocks including Amazon, Meta Platforms, Micron Technology, and Advanced Micro Devices.

This Vanguard ETF can help young investors build a solid retirement fund

The Vanguard S&P 500 Growth ETF has delivered a compound annual return of 16.9% since it launched in 2010, outpacing the S&P 500 which climbed by an average of 14.2% per year over the same period.

The 2.7 percentage-point difference in annual returns might not sound like much, but it can have a substantial effect on the dollar value of an investment over the long run thanks to the magic of compounding. Past performance isn't always a reliable indicator of future results, but a 25-year-old investor could build a very nice retirement fund using the Vanguard S&P 500 Growth ETF if its historical returns persist. Here's what can happen with just a $10,000 investment over 40 years, compounded annually.

Simply put, the investor could have more than twice as much money in retirement by focusing on growth from a young age, compared to taking a more conservative approach.

While AI is driving the S&P 500 Growth index higher right now, the tech sector has a deep pipeline of innovative products like autonomous vehicles, humanoid robots, and quantum computers that could fuel strong returns for decades to come.

As a result, it might be a good idea to hold the Vanguard S&P 500 Growth ETF even beyond retirement age. With a large enough balance after 40 years, the subsequent annual returns could provide a substantial income to fund life after employment.

Should you buy stock in Vanguard Admiral Funds - Vanguard S&P 500 Growth ETF right now?

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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, Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.