The S&P 500 (SNPINDEX: ^GSPC) is an index of 500 companies listed on U.S. stock exchanges. It’s a prestigious achievement for any company to be admitted into the index, and only the highest-quality names make the cut.

Selection is at the discretion of the Index Committee, but companies must be profitable, and they also need a market capitalization of at least $18 billion. That figure rises over time, because the S&P 500 is weighted by market cap, which means the largest companies in the index have a greater influence over its performance than the smallest.

As a result, technology has become the largest sector in the index with a weighting of 31.4%. It includes trillion-dollar giants Microsoft, Apple, and Nvidia.

Meet the S&P 500 Growth index

The S&P 500 Growth index holds around 231 of the best-performing stocks in the regular S&P 500, and excludes the rest. It selects those stocks based on factors like their momentum and the sales growth of the underlying companies.

Therefore, it’s no surprise the tech sector has a whopping 50.2% weighting in the Growth index. Nvidia, for example, grew its revenue by 262% year over year during its most recent quarter, and its stock has soared 200% over the past 12 months alone.

But here’s the best part. The Growth index rebalances every quarter, which means it removes stocks that no longer meet its criteria for inclusion and replaces them with more suitable candidates. As a result, this index has typically outperformed the regular S&P 500 over the long term.

The Vanguard S&P 500 Growth ETF tracks the S&P 500 Growth index

The Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) is designed to track the performance of the S&P 500 Growth index by holding the same stocks and maintaining similar weightings.

The below table shows the top five holdings in the Vanguard ETF, and how their weightings compare to the regular S&P 500:

Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024, and are subject to change.

The Vanguard ETF delivered a return of 36.5% over the past year, comfortably outperforming the S&P 500, which is up 30.2%:

There were two factors at play:

1. The five stocks in the above table have delivered an average return of 76.7% over the past year, and since they have a much higher weighting in the Vanguard ETF relative to the S&P 500, that contributed to the outperformance of the ETF.

2. As I mentioned earlier, the Growth index (and by extension, the Vanguard ETF), only holds the top-performing stocks from the S&P 500 and excludes the laggards, which also contributed to the higher return in the ETF.

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The Vanguard ETF can outperform the S&P 500 over the long term

The Vanguard ETF has delivered a compound annual return of 15.9% since it was established in 2010, beating the average annual gain of 13.7% in the S&P 500 over the same period. While that 2.2 percentage point difference each year doesn’t sound like much, it makes a big impact in dollar terms thanks to the effects of compounding:

Calculations by author.

If technologies like cloud computing, semiconductors, and artificial intelligence continue to drive the tech sector forward, the largest holdings in the Vanguard ETF are likely to remain constant in the coming years. In that scenario, I predict the ETF will continue outperforming the S&P 500.

However, even if there is a shift in market leadership, the Growth index will rebalance as necessary. Therefore, if the Vanguard ETF does suffer a period of underperformance relative to the S&P 500, I think it’s likely to be very short-lived.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool 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.

Prediction: This Unstoppable Vanguard ETF Will Keep Beating the S&P 500 Over the Long Term was originally published by The Motley Fool

(Bloomberg) — China has initiated stress tests with financial institutions on their bond investments, to make sure they can handle any market volatility should a record-breaking rally reverse, according to state-run media.

Most Read from Bloomberg

The People’s Bank of China has made a gradual start to the tests recently, wary that a bull run might lead to one-sided bets in long-term government bonds, according to a front-page report by Financial News. Its intention may not necessarily be to significantly push yields higher, the central bank-backed newspaper said citing an unidentified source.

Financial institutions should be able to cope with large drops in bond prices, as crowded holdings in debt positions could easily turn into a “stampede” in the event of a sharp yield reversal, Financial News said. That can raise the likelihood of a liquidity crisis and threaten financial stability, it added.

A stellar rally in Chinese bonds has stalled amid measures to cool sentiment including having state banks sell some bonds and gathering financial institutions for meetings. That has triggered a collapse in government bond trading as investors consider the regulatory moves.

The central bank did not seek to nor will it seek to ban legitimate investments or trading in its government bonds, but it sees risks in a buying spree of the securities, Bloomberg earlier reported, citing people familiar with the PBOC’s thinking.

By doing the tests, the authorities want to see if banks can handle drastic market swings in hypothetical and extreme conditions with their current holdings of assets, the paper said. In the case of the bond market, officials may want to see how banks can react if yields surge by 10, 20 or even 50 basis points in a sudden move, it added.

Financial risks in key areas are being resolved in an orderly manner, PBOC Governor Pan Gongsheng said in an interview with state broadcaster China Central Television that aired Saturday. China will adhere to a supportive monetary policy stance and promote credit growth and gradual decline funding costs, he added.

(Update with more details in the report)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Despite some volatility in the stock market so far in August, Nvidia stock (NVDA) remains up over 150% this year.

Driving the stock is Nvidia’s role in supplying chips to major tech giants like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) that are crucial for artificial intelligence technology amid the broader generative AI boom.

Over a third of the S&P 500 (^GSPC) market cap gains in the first half of 2024 could be attributed to Nvidia. For some investors, the concentration of gains in a few stocks such as Nvidia seems risky. It was a point that was underlined earlier this month by a stock rout that briefly pushed the volatility index (^VIX) above 60 and shares of Nvidia down by as much as 10%.

Stocks ended up recovering, but the period offered a reminder to investors that they could seek AI opportunities elsewhere.

For those looking to gain an edge and diversify their tech holdings, understanding AI’s core technology and terminology is essential.

Here’s a breakdown of a few of the terms you need to know to invest in the AI boom:

Inference

Inference is AI’s moment of truth. It’s when an AI model like ChatGPT generates an answer to a prompt based on its previous training and learning. The quality of an AI system’s inference relies heavily on its underlying technology stack, including the powerful chips that drive it.

Compute

Compute power is the driving force behind an AI system’s success, similar to how horsepower propels a car. The greater the compute power, the more efficient and faster the inference process becomes.

Processing power, memory, and storage all fuel compute power, and chipmakers tend to focus on increased compute power for new chip releases because improvements in compute power with each chip generation could allow companies to charge more, which typically bodes well for future profit margins.

GPUs

Graphics processing units, or GPUs, are advanced and expensive chips that power AI. Their quality can help determine the speed of AI computations. Nvidia, which began working on GPUs in the ’90s, owns over 80% of the GPU market and mentioned the term 19 times in its first quarter earnings presentation. Nvidia’s GPUs have increased AI inference performance by a thousand times over the last decade.

Hyperscalers

Big Tech companies like Microsoft, Alphabet (GOOG, GOOGL), Meta (META), and Amazon are considered hyperscalers, or those capable of rapidly scaling AI. With products and services such as Microsoft’s Copilot, Alphabet’s Gemini, and Meta’s Llama, these companies are significant both as consumers of AI chips and competitors to chipmakers.

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