The S&P 500 (^GSPC +0.79%) has advanced 10% in the past year, an impressive return by any standard. But these two Vanguard index funds have generated superior returns:

• The Vanguard U.S. Momentum Factor ETF (VFMO +0.60%) has added 22% year to date.
• The Vanguard Information Technology ETF (VGT +3.12%) has added 23% year to date.

Here's what investors should know about these index funds.

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The Vanguard Momentum Factor ETF: 22% gain year to date

The Vanguard Momentum Factor ETF is an actively managed fund that uses a rules-based quantitative model to select stocks with strong recent performance. It currently tracks 670 equities, most of which come from the technology sector. The top five holdings are, as listed by weight:

1. Alphabet: 1.3%
2. Applied Materials: 0.9%
3. Advanced Micro Devices: 0.9%
4. KLA: 0.8%
5. Micron Technology: 0.8%

If dividends were reinvested, the Vanguard U.S. Momentum Factor ETF returned 88% over the past three years, which is equivalent to 23.4% annually. But the S&P 500 returned 71%, which is equivalent to 19.6% annually. Going further back, the Vanguard U.S. Momentum Factor also beat the S&P 500 by four percentage points over the past five years.

With a modest expense ratio of 0.13% and track record for outperformance, this Vanguard index fund is a convenient way to get exposure to the hottest stocks on the market. But investors should understand that momentum stocks tend to be more volatile than the broader market, and volatility cuts both ways.

Momentum stocks tend to outperform when the broader market is rising, but they tend to underperform when the broader market is falling. For instance, after President Trump announced sweeping tariffs in April 2025, the S&P 500 declined 19% while the Vanguard U.S. Momentum Factor ETF dropped 25%.

The Vanguard Information Technology ETF: 23% gain year to date

The Vanguard Information Technology ETF is a passive fund that tracks 321 small, medium, and large stocks in the technology sector. The index fund is most heavily weighted toward the semiconductor, hardware, and software industries, but it also includes IT consultants and electronic component suppliers. The five largest holdings are:

1. Nvidia: 16.1%
2. Apple: 14.3%
3. Microsoft: 8.2%
4. Micron Technology: 5%
5. Broadcom: 3.8%

If dividends were reinvested, the Vanguard Information Technology ETF returned 105% over the last three years, which is equivalent to 27.1% annually. Meanwhile, the S&P 500 gained 71%, which is equivalent to 19.6% annually. The Vanguard Information Technology ETF also beat the S&P 500 by 46 percentage points over the past five years.

With an expense ratio of 0.09%, this fund provides cheap exposure to hundreds of stocks that are likely to benefit from the artificial intelligence boom. Furthermore, the index fund currently trades at 36 times earnings, which is a reasonable valuation when technology sector earnings are projected to increase at 44% annually through 2027, according to LSEG.

However, the Vanguard Information Technology ETF is also highly concentrated in a small number of stocks. Nvidia, Apple, and Microsoft account for nearly 40% of the fund's performance. So, investors who already own large positions in those stocks should avoid this index fund unless they truly want to double down on those companies.

Here's the big picture: Index funds are essentially ready-made portfolios that make investing simpler. They are a great option for anyone who prefers not to research individual stocks, but investors don't have to choose between the two. In fact, CNBC's Jim Cramer recently made a good argument for owning both. He thinks investors should split their money 50-50 between index funds and stocks. He says index funds are "insurance against your individual stock portfolio blowing up in your face."