Nearly every financial article you read will tell you the same thing. Over the long haul, almost nothing beats the S&P 500. The index has compounded at roughly 10% a year for almost a century, and a single low-cost fund replicating it has become the default setting for retirement accounts across the country.
Things are changing fast, and some ETFs have delivered persistent alpha for years, or even decades. Naturally, you will have to take more risk, and there’s no guarantee that these ETFs will continue to outperform. But if you want to do more than “just buy the index” and you’re willing to take a bit more risk to widen your lead, look no further.
Vanguard Growth Index Fund ETF (VUG)
The Vanguard Growth Index Fund ETF (NYSEARCA:VUG | VUG Price Prediction) tracks the performance of large-cap growth stocks in the U.S. market. It does so by following the CRSP US Large Cap Growth Index. These large caps have done exceedingly well in recent years and in the past, allowing the ETF to outperform the S&P 500.
The focus here is not as narrow as the mega-cap Magnificent 7 ETFs. VUG has exposure to 167 U.S. companies with “strong growth characteristics,” so you also get diversification to protect you against downside risk.
The difference in VUG’s returns against the S&P 500 may look minuscule at first, but when you look at the gains holistically, it becomes significantly more attractive. If we take total gains in the past 20 years (since 2005), VUG has delivered 557.46% in total returns against the SPDR S&P 500 ETF Trust’s (NYSEARCA:SPY) 362.22% in total returns. This amounts to 9.87% gains per year for VUG and 7.95% for the SPY. Recent trends in the market are also favorable to VUG as investors are increasingly concentrating their portfolios into the top performers.
The net expense ratio of VUG is 0.04%, or just $4 per $10,000. This is better than most S&P 500 ETFs. The caveat is that the dividend yield of 0.44% is much lower than the SPY’s 1.12%, but the calculations above account for it, and VUG still outperforms.
VanEck Semiconductor ETF (SMH)
VanEck Semiconductor ETF (NASDAQ:SMH) gets you solid exposure to the biggest players in the semiconductor industry. Chip stocks outperforming is by no means a recent phenomenon, and they have delivered consistent alpha well before AI became popular.
I would not recommend SMH if you believe the Nasdaq will undergo a 2000-esque decline. This ETF was one of the worst performers as the Dot Com bubble burst, though not having some exposure to it would be a mistake. AI is proving naysayers wrong, and major companies in this field are beating and raising almost every quarter.
SMH seeks to replicate the price and yield performance of the MVIS US Listed Semiconductor 25 Index. It invests at least 80% of its total assets in securities that comprise its benchmark index, following companies that derive at least half their revenue from semiconductors. The ETF’s holdings are quite concentrated, with Nvidia (NASDAQ:NVDA) constituting 21.68% of assets, followed by Taiwan Semiconductor (NYSE:TSM) at 10.63% and Broadcom (NASDAQ:AVGO) at 9.64%.
If you held SMH for the past 20 years, it would have returned a staggering 1,641.52% in total.
The net expense ratio is also low at 0.35%, or $35 per $10,000.
Invesco NASDAQ 100 ETF (QQQM)
The Invesco NASDAQ 100 ETF (NASDAQ:QQQM) tracks the NASDAQ-100 Index, meaning it tracks the 100 largest non-financial companies listed on the Nasdaq stock exchange. You may ask, “Why not just buy the QQQ?” and the answer is that QQQM is slightly better if you seek to buy and hold for the long run. QQQM’s net expense ratio is 0.15%, or $15 per $10,000, compared to the QQQ’s 0.20%. This tiny difference could compound over the years into a meaningful amount.
The QQQ is perhaps the most reliable way to outperform the S&P 500 over the long run. It does not focus on a narrow sector, nor does it deal with leverage or momentum. It simply focuses on the broader tech industry, and this industry has been spearheading the economy for the past 20 years. Given that AI is spilling over into the industrial and blue-collar sectors, nothing suggests that tech will stop being the driving force of the global economy.
QQQM is quite recent, so we’ll use the QQQ as a yardstick for long-term returns. Total returns are at 933.28% over the past 20 years.
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