Prediction: Vanguard's 3 Best-Performing ETFs Over the Last 5 Years Will Also Beat the S&P 500 Over the Next 5 Years

Vanguard has over 80 low-cost exchange-traded funds (ETFs) that expose investors to equity, fixed income, and other products. But the best-performing ETFs over the past five years have been the Vanguard Information Technology ETF (NYSEMKT: VGT) , the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) , and Vanguard Russell 1000 Growth ETF (NASDAQ: VONG) .

All three funds are up more than 25% over the past year and have averaged between an 18% and 22% annual return over the last five years and a 16% to 20% annual return over the last decade. They also have expense ratios of 0.1% or less, meaning that investors incur annual fees of no more than $1 for every $1,000 invested.

Here's why these funds have what it takes to continue beating the S&P 500 for years to come.

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Betting on the biggest and the best

The Vanguard Information Technology ETF mirrors the performance of the tech sector. Microsoft , Apple , and Nvidia are all classified as tech stocks, whereas some companies that are often thought of as "tech stocks" may be in different sectors.

For example, Amazon and Tesla are classified as consumer discretionary, and Alphabet , Meta Platforms , and Netflix are communications stocks, which excludes them from the Information Technology ETF. However, they are all holdings of the Mega Cap Growth ETF and the Russell 1000 Growth ETF.

The Mega Cap Growth ETF has just 71 holdings compared to 396 in the Russell 1000 Growth ETF, which filters growth stocks from a larger sample size. This gives the Mega Cap Growth ETF slightly higher concentrations in the largest companies. However, the Russell 1000 Growth ETF could be a better choice if you're interested in more diversification.

Despite differences among the three funds, the size of the largest growth stocks makes these ETFs boom or bust based on the performance of just a handful of companies. The Information Technology ETF has a whopping 47.1% concentration in Microsoft, Apple, and Nvidia. The Mega Cap Growth ETF has a 37.8% weighting in those three stocks, and the Russell 1000 Growth ETF has a 34.5% weighting.

The Mega Cap Growth ETF has a 62.9% weighting in its 10 largest holdings compared to 61% for the Information Technology ETF and 59.8% for the Russell 1000 Growth ETF. Investors may gravitate to ETFs for diversification. But these three ETFs have their top holdings to thank for their outsized gains rather than spreading their allocations more evenly across other holdings.

Winning formulas

The simplest way for all three ETFs to maintain their outperformance is if Microsoft, Apple, and Nvidia continue beating the S&P 500 . If those three companies cool off over the long term, it would be very difficult for these ETFs to have such impressive gains.

Winning stocks tend to combine earnings growth and a premium valuation. A company can grow earnings at an impressive clip, but for the stock to do well, the market must reward that growth. Companies with temporary performance spikes that lack a runway for future growth may see their stock prices languish. Microsoft, Apple, and Nvidia have a runway for future growth, but in entirely different ways.

Microsoft is monetizing artificial intelligence (AI) across cloud infrastructure and enterprise software. It is seeing margin expansion across its newer and legacy business units. It is ramping up AI investments while supporting a massive buyback program and dividend growth. Microsoft has a balanced business that can reward investors in many ways -- giving it plenty of levers to pull no matter what the economy is doing.

At the beginning of the year, Apple stock was down and drastically underperforming the major indexes. However, that is no longer the case, as the market is getting excited about Apple's potential AI monetization through its products, which could inject much-needed growth into the products side of the business. For years, Apple has relied on stock repurchases and services such as Apple Pay, Apple Music, and iCloud for earnings growth. If Apple can boost earnings from AI-powered phones , it could help the business return to the pace of growth that long-term investors have come to expect and allow the stock to continue to beat the market.

Nvidia is a high-margin cash cow that has been the market darling of the AI-fueled growth market. The stock has been all over the place -- surpassing $130 a share in June, falling below $100 a share earlier this month, and is now back to around $130 a share just a few weeks later. The company has benefited from both earnings growth and valuation expansion. Over the last three years, diluted EPS has been up 426%, and the stock has been up 489%. If Nvidia maintains its growth rate, the stock could easily continue to crush the market and be a major catalyst for driving outperformance in the three discussed Vanguard ETFs.

There are concerns that Nvidia may be in the early stages of seeing its AI bubble burst due to lower demand from key customers and competition, which could compress profit margins and lead to lower earnings growth. Given the cyclicality of its end markets, Nvidia stock can do just about anything in the short term. However, over the long term, it has plenty of ways to monetize several end markets , making it a worthwhile candidate to help the multi-year performance of top Vanguard growth ETFs.

Volatility comes with the territory

In addition to their operational prowess, Microsoft, Apple, and Nvidia all have more cash, cash equivalents, and marketable securities than long-term debt on their balance sheets. Liquidity can help all three companies take market share no matter the economic cycle, which is a major advantage over companies that have to cancel projects during a slowdown.

All three Vanguard ETFs are excellent choices for investors looking for a variety of mega-cap growth stocks. However, many of the largest holdings have become more expensive, which could lead to heightened volatility over the short term if quarterly results disappoint. Therefore, only folks with a high risk tolerance and at least a three- to five-year investment time horizon should approach these companies now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. 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. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, and Tesla. 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 .