2 Vanguard ETFs Using Momentum to Outpace the S&P 500

The S&P 500 is the stock market's most popular index by a large margin and has become the de facto benchmark for measuring the performance of other stocks and indexes. If the returns are less, they're underperforming; if the returns are higher, they're outperforming.

So far this year, the S&P 500 is up 10%. That's right around its long-term annual average -- so far, so good, all things considered.

There are, however, two Vanguard exchange-traded funds (ETFs) with momentum and a good chance of outperforming the S&P this year. They each have a different focus, but that has uniquely worked out in each ETF's favor so far.

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1. The Vanguard Information Technology ETF

The Vanguard Information Technology ETF (NYSEMKT: VGT) holds 323 companies from the sector that it's named for, covering every tech industry you can imagine. But although it covers a lot of ground, it's very top-heavy, with Nvidia, Apple, and Microsoft accounting for over 38% of the ETF.

Nvidia and Apple have had good starts to the year, up 10% and 21%, respectively, but Microsoft has been headed in the opposite direction, down over 16% (as of July 16). However, much of this ETF's strong performance so far this year (it's up 21%) is attributable to its semiconductor holdings.

Chipmakers account for nearly 38% of the fund, and right now, they're some of the hottest stocks on the market. Micron Technology, Advanced Micro Devices, and Applied Materials are all top-10 holdings (nearly 11% of the ETF), and even Applied Materials -- the worst performer this year -- is still up 121%.

MU data by YCharts.

With the ongoing artificial intelligence (AI) boom, the Information Technology ETF has routinely been an outperformer, but the drivers of its outperformance have shifted. It began with major AI hyperscalers, like the "Magnificent Seven" stocks, and now it's leaning more on niche providers, such as semiconductor companies that deal with storage and memory hardware.

Part of it is the major need for storage and memory hardware in data centers, and the lucrative position that situation has put companies in, with demand far outpacing supply. The other part is that more value has been found in smaller tech companies than in the multitrillion-dollar tech giants.

If you can stomach the concentration, this is a good tech ETF, but it's worth noting that although companies such as Amazon, Alphabet, and Meta Platforms are considered tech companies by most people's standards, they're listed in other sectors and therefore not included in the Vanguard Information Technology ETF.

2. The Vanguard Energy ETF

After a lull, the energy sector has made a comeback this year, largely due to the conflict in the Middle East and its trickle-down effects. Energy prices, including for oil and electricity, have been inflated for most of the year, and the unsurprising beneficiaries of that have been energy stocks. And rest assured, where more profits are being made, there's more investor interest.

The Vanguard Energy ETF (NYSEMKT: VDE) has been one of the best ways to benefit from the increased interest and growth of the energy sector, which is the S&P 500's best-performing sector so far this year. It holds 111 energy stocks, but like the Vanguard Information Technology fund, its top holdings have a large influence.

ExxonMobil and Chevron account for over 35% of the ETF, but that has worked out in its favor, with both companies performing well this year.

Right now, the energy sector is performing well, but much of it remains at the mercy of developments in the Middle East. The situation is volatile (to put it lightly), and I would expect this ETF to follow that same path. Either way, it makes for a good complementary portfolio piece because many major indexes are lacking in the energy sector.

We can't predict how stocks will perform, but it would be surprising if the Vanguard Energy ETF didn't finish the year ahead of the S&P 500.

Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Applied Materials, Chevron, Meta Platforms, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.