ETFs
The S&P 500 Just Hit an All-Time High, But These 3 Vanguard ETFs Have Performed Even Better Over the Past 5 Years
THE S&P500 is in great shape, up 10.7% since the start of the year, 27.1% over the last 12 months and 37.6% since the end of 2022. And over the last five years, the Vanguard S&P 500 ETF (NYSEMKT: VOO) — a mammoth exchange traded fund (ETF) with over $1 trillion in assets – produced a total return (including capital gains and dividends) of over 102%.
That’s an impressive feat, and yet it still doesn’t measure up to the five-year total returns of Vanguard Growth ETF (NYSEMKT: VUG), Vanguard Mega Cap Growth ETF (NYSEMKT: MGK), and Vanguard Information Technology ETF (NYSEMKT:VGT). Here’s a look at what’s fueling this outperformance and whether you should buy these ETFs now.
Image source: Getty Images.
Broad exposure to growth
The largest Vanguard ETFs have an expense ratio of 0.03%; this is the S&P 500 ETF, Vanguard Total Stock Market ETFand the Vanguard Total Bond Market ETF. But close behind is the Vanguard Growth ETF, with an expense ratio of just 0.04% and net assets of $220 billion.
The fund essentially applies a growth filter on the S&P 500 and narrows it down to 200 stocks. The result is a higher concentration in large companies, primarily in the technology, consumer discretionary and communications sectors.
The Vanguard Growth ETF has outperformed the S&P 500 over the past five years, but the trend hasn’t been straight:
VOO Total Return Level Chart
The fund was crushed in 2022 due to a widespread sell-off in big tech. The cumulative market capitalization of “Magnificent Seven,” including Microsoft, Apple, Nvidia, Alphabet, Amazon, MetaplatformsAnd You’re here, ended 2022 at $6.9 trillion. Today, the combined market capitalization of these seven companies reaches a staggering $14.4 trillion, meaning the market capitalization of the Magnificent Seven has more than doubled in less than 18 months.
The outsized returns of large-cap growth stocks are the Vanguard Growth ETF’s recipe for success. It’s also worth mentioning that the ETF includes a variety of securities that may not be considered traditional growth stocks, like Visa, MasterCardand even McDonalds. The fund examines which companies have the best growth potential in a given sector, which adds a layer of diversification that would be missed by focusing only on hot growth stocks.
With this in mind, the Vanguard Growth ETF is ideal for an investor who wants broad market exposure with a growth lens rather than through the S&P 500 or a total market fund.
Target the fastest growing stocks on the market
The Vanguard Mega Cap Growth ETF embodies everything that has been working in the market lately. This essentially goes further with the Vanguard Growth ETF by condensing it to just 79 stocks. This approach applies the largest weightings to the top holdings, making the fund more concentrated and vulnerable to a potential sell-off in those holdings, but also giving it greater exposure in the event of outperformance.
The story continues
For example, the Vanguard Growth ETF has 65% of its weighting concentrated in its top 15 holdings, while the Vanguard Mega Cap Growth ETF has a 72% weighting in its top 15 holdings.
The two ETFs are similar, with exactly the same 15 largest holdings: in order, they are Microsoft, Apple, Nvidia, Amazon, Alphabet, Amazon, Meta Platforms, Elie LillyTesla, Visa, Mastercard, Costco wholesale, Advanced microsystems, Selling power, NetflixAnd Linde.
The Mega Cap Growth ETF has a slightly higher expense ratio at 0.07% compared to the Growth ETF’s 0.04% – but that only represents a difference of $3 for every $10,000 invested.
Investors who want even higher exposure to the biggest growth stocks should choose the Vanguard Mega Cap Growth ETF over the Vanguard Growth ETF.
An inexpensive way to invest in the technology sector
If you had invested five years ago, the Vanguard Information Technology ETF would have nearly tripled your money (including dividends). Although technology is the most weighted sector in the Vanguard Growth ETF and the Vanguard Mega Cap Growth ETF, the weightings of some of the slightly smaller (but still important) technology stocks are noticeably lower in these funds than in a purely sector play. funds. The following table illustrates this distinction well:
|
Microsoft |
17.3% |
14.4% |
12.5% |
|
Apple |
15.3% |
12.4% |
10.8% |
|
Nvidia |
11.9% |
10.1% |
8.9% |
|
Broadcom |
4.4% |
0% |
0% |
|
Selling power |
2% |
1.3% |
1.1% |
|
Advanced microsystems |
2% |
1.4% |
1.1% |
|
Adobe |
1.6% |
1.1% |
0.9% |
|
Cisco Systems |
1.5% |
0% |
0% |
|
Accenture |
1.4% |
1% |
0.8% |
|
Oracle |
1.4% |
0% |
0% |
Data source: Vanguard.
The Vanguard Information Technology ETF has a higher weighting of technology stocks than the Vanguard Mega Cap Growth ETF or the Vanguard Growth ETF. But an important detail is that some big tech stocks aren’t even in the Mega Cap Growth ETF or Growth ETF. Among the top 10, Broadcom, Cisco Systems and Oracle are completely absent – which may seem strange given that these are leading companies in their sectors.
The reason is that these three companies are leading technology companies in the Vanguard Value ETF (NYSEMKT: VTV) – which excludes Microsoft, Apple, Nvidia and the rest of the Magnificent Seven. The allocation is a bit of product marketing on Vanguard’s part, as it classifies certain tech stocks as value plays so the Value ETF has some tech. But the biggest lesson is that it’s important to understand what you own, especially when it comes to ETFs. Even some of the largest and most reputable ETFs have nuances that you should be aware of before investing.
The Vanguard Information Technology fund has an expense ratio of 0.1%. That’s technically higher than the other two ETFs, but it’s a negligible difference unless you’re investing hundreds of thousands of dollars in these funds.
Approach growth investing in a way that suits your risk tolerance
All three ETFs outperform the S&P 500 because they have more exposure to large-cap growth stocks. But this feature is a double-edged sword, as these ETFs can be expected to underperform benchmarks in the event of a widespread sell-off in large-cap growth stocks.
If you’re interested in growth stocks, regardless of sector, then the low-cost Vanguard Growth ETF is a great bet. If you want even more exposure, consider the Vanguard Mega Cap Growth ETF. But if you want to address growth specifically through the technology sector, then the Vanguard Information Technology ETF and its 44.5% weighting in Microsoft, Apple, and Nvidia may be the best option.
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Daniel Foelber holds positions in Advanced Micro Devices. The Motley Fool holds positions and recommends Accenture Plc, Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Cisco Systems, Costco Wholesale, Linde, Mastercard, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Salesforce, Tesla, Vanguard Bond . Index Funds-Vanguard Total Bond Market ETF, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Total Stock Market ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF and Visa. The Motley Fool recommends Broadcom and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short $310 calls in January 2025 on Accenture Plc, short calls of $380 in January 2025 on Mastercard and short calls of January 2026 at $405 on Microsoft. The Mad Motley has a disclosure policy.
The S&P 500 Just Hit an All-Time High, But These 3 Vanguard ETFs Have Performed Even Better Over the Past 5 Years was originally published by The Motley Fool