ETFs
This Vanguard ETF just hit an all-time high as it continues to outperform the S&P 500 and Nasdaq Composite over the past 5 years.
Betting on the growth of mega-caps has proven to be a winning strategy.
Investors often face the challenge of choosing individual stocks to beat the market or simply invest in a way that suits their risk tolerance and helps them achieve their financial goals. But finding a quality, low-cost exchange-traded fund (ETF) that provides diversification and can beat the market is a passive investor’s dream come true.
If you had invested in the S&P500 (^GSPC -0.27%) five years ago, you would have doubled your stake. THE Nasdaq Composite (^IXIC -0.18%) generated an even better return. But the Vanguard Mega Cap Growth ETF (M.G.K. -0.23%) takes the cake with a total return of 138% over the last five years.
Here is why this ETFs has what it takes to continue to outperform the major indices.
Image source: Getty Images.
A fund full of leading growth stocks
If you are familiar with ETFs, you have probably heard of Vanguard S&P 500 ETF (VOO -0.29%), which reflects the performance of the S&P 500. There is also the Vanguard Mega Cap ETF (MGC -0.32%), which has approximately 300 fewer stocks than the Vanguard S&P 500 ETF and focuses on the largest U.S.-based companies by market capitalization.
Then there’s the Vanguard Mega Cap Growth ETF, which has just 79 holdings and targets the largest, fastest-growing companies. This strategy makes the fund extremely top-heavy. Of this fund, 81% is allocated to the technology, communications and consumer discretionary sectors – an even higher concentration than the Nasdaq Composite.
|
Technology and communications |
59.4% |
41.2% |
63.2% |
38.3% |
|
Discretionary consumption |
21.6% |
14.1% |
14.1% |
10.3% |
|
Industrial |
7% |
ten% |
4.3% |
8.8% |
|
Health care |
6.9% |
12.2% |
6.9% |
12.3% |
|
Financial datas |
1.7% |
10.1% |
4% |
13.1% |
|
Basic materials |
1.5% |
1.2% |
1.1% |
2.4% |
|
Real estate |
1% |
1% |
0.9% |
2.2% |
|
Energy |
0.60% |
3.9% |
0.7% |
4.1% |
|
Basic consumption |
0.30% |
4.8% |
4% |
6.2% |
|
Utilities |
0% |
1.5% |
0.9% |
2.3% |
Data sources: Vanguard, Fidelity.
Due to its structure, this fund will primarily gain or lose based on a handful of sectors and companies.
Mega domination
For the Vanguard Mega Cap Growth ETF to continue to outperform the S&P 500 and Nasdaq Composite, big tech must continue to beat the market. And for that to happen, big tech companies need to grow earnings at a faster rate than the market and enjoy a higher-than-market valuation. It takes both strong fundamentals and investor optimism to become a market-beating sector.
The Vanguard Mega Cap Growth ETF goes a step further by betting on big tech, not just tech, to produce outsized gains. In recent years, particularly in the last 18 months or so, the largest companies have reached levels once thought impossible.
Apple knocks on the door of a $3 trillion market capitalization to join Microsoft in this exclusive club. Nvidia And Alphabet are both worth over $2 trillionwith Amazon just behind with 1.9 billion. The combined market capitalization of the stocks of the “Magnificent Seven” alone is $14.2 trillion. As a reminder, the market capitalization of the entire S&P 500 just 11 years ago was $14 trillion.
Given the pace of big tech’s value creation, it may seem like a slowdown is inevitable at some point. But big tech has suffered downturns before – several in fact during its torrid times. The Vanguard Mega Cap Growth ETF fell more than 22% between October 1, 2018 and Christmas Eve 2018, primarily due to tensions related to the US-China trade war. Most recently, it lost more than a third of its value in 2022.
Mega-cap growth will likely remain volatile in the years and decades to come, as these companies’ valuations are based largely on future earnings growth rather than rolling earnings.
This ETF has room to perform
The most important question growth investors should ask is whether mega-cap growth will be able to monetize artificial intelligence (AI) or whether AI will be a net disruptor of big tech and lead over time small businesses to supplant today’s largest companies.
The history of the technology sector is littered with small, innovative companies that took market share and even bankrupted incumbents. Why should AI, the next evolution of technology, be any different? But generally speaking, I think mega-cap techs are very well positioned to monetize AI, probably better than smaller companies. We will use Microsoft as an example since it is currently the most valuable company in the world.
Microsoft has done a great job using AI as an upgrade to existing solutions. Microsoft’s generative AI assistant, called Copilot, is available for the traditional Windows suite of applications as well as other products. Microsoft has also integrated AI to improve its cloud infrastructure business through Azure OpenAI. GitHub AI is yet another example of taking an existing platform into account and using AI to accelerate growth.
Add to that Microsoft’s high margins, massive free cash flow generation, existing cash position and strong balance sheet, and the company has even more advantages to make strategic acquisitions or ride out a recession. Microsoft’s diverse business model spans so many consumer and business touchpoints that it’s hard to imagine it won’t net benefit from AI.
Just ten years ago, a $3 trillion market cap seemed impossible. But I think in 10 years we will be dealing with companies valued at over $10 trillion, and Microsoft will be one of them because of its vast resources, market positioning and ability to monetize the AI.
The snowball effect
For just 0.07% annual fee – or 70 cents for every $1,000 invested – the Vanguard Mega Cap Growth ETF is one of the simplest and least expensive ways to invest in companies with more high increase. At its core, it is a bet on the growth of large companies through their advantages.
Size arguably plays a more important role in mega-cap growth than other sectors. In other industries, like consumer staples, for example, a company like Coca-Cola can buy another brand of drink, but that just adds another revenue stream. In the case of Microsoft, there is a snowball effect with capital investments that can benefit multiple aspects of the business.
Investors who believe mega-cap technology is well-positioned to monetize AI should consider this Vanguard fund as a foundational stock worth purchasing and adding to over time.
Suzanne Frey, an executive at Alphabet, 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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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 holds positions in and recommends the Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETFs. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short calls from $405 in January 2026 on Microsoft. The Motley Fool has a disclosure policy.