You Can Do Better Than the S&P 500. Buy This ETF Instead.

There's nothing wrong with the S&P 500 (SNPINDEX: ^GSPC) market index.

It reflects the overall health of the American stock market, with a quality filter based on market capitalization. Investing in this market tracker through exchange-traded funds (ETFs) like the SPDR S&P 500 Trust (NYSEMKT: SPY) gives you a ton of diversification and sets you up for robust long-term returns.

If you invested $1,000 in the SPDR fund 10 years ago and set the position up to reinvest dividend payments in more shares, you would have $3,500 today. That's a compound annual growth rate (CAGR) of 13.2%, leaving inflation rates far behind. Many investors get started in a popular SPDR 500 fund and let it run for decades, building wealth with zero investor effort.

But what if I told you that there are ETFs with even better long-term returns? For instance, the Vanguard Information Technology ETF (NYSEMKT: VGT) tends to beat the S&P 500's returns in the long haul. It's one of my favorite ETFs. Let me show you how it works.

Why this Vanguard fund is one of my favorite ETFs for long-term growth

As you can see in the chart above, the Vanguard IT ETF has been crushing the S&P 500 and its index trackers over the last decade. The total returns work out to a CAGR of 20.9%. Over this period, a hypothetical $1,000 investment would have grown to $6,678.

And that's just a simple one-time move with no further cash investments added over time. Let's imagine an automated dollar-cost averaging plan instead, starting with just $100 in the fall of 2014 and adding another $100 to that Vanguard IT ETF position per month. Some investors can do this as a paycheck deduction, others might set up automatic transfers, and a few may prefer doing it by hand.

Whatever method you use, these fairly painless contributions would add up to $12,000 in a decade. The investment returns would be roughly $29,000, working out to a total investment value of $41,118.

Doing the same thing with the SPDR S&P 500 fund instead would have yielded respectable results, too. The same $12,000 investment should be worth $25,174 by now, more than doubling your money in 10 years.

Like I said, there's nothing wrong with that. Still, I'd rather have the stronger returns from the IT market tracker.

There's no reward without additional risks

Of course, I can't promise market-stomping returns over every conceivable time period. The fund underperformed the S&P 500 in its first five years on the market, ending amid the subprime market meltdown of 2008-2009. The inflation crisis of 2022 was no fun for Vanguard IT ETF investors, either.