Here’s why Vanguard’s largest growth fund continues to outperform the S&P 500 and Nasdaq Composite

By | April 1, 2024

We’re only a quarter into 2024 and already Nasdaq Composite And S&P500 have risen more than 9% so far. But Vanguard’s largest growth-oriented exchange-traded fund (ETF) has risen even more sharply.

This is why the Vanguard Growth ETF (NYSEMKT: VUG) continues to outperform major indexes while achieving diversification; why the ETF could continue to outperform, and whether it’s worth buying now.

Two people look at a phone in shock.

Image source: Getty Images.

Built to make winners run

The Vanguard Growth ETF focuses on the largest US-based growth stocks, regardless of the sector or exchange on which they trade. This is a different approach than the S&P 500 – which tracks the 500 largest US companies by market capitalization (although there are a few other qualifications) or the Nasdaq Composite, which covers the largest companies on the Nasdaq Stock Market but not the stock exchange. New York.

While the Nasdaq typically includes younger, more growth-oriented companies, the New York Stock Exchange has some powerful growth stocks that you wouldn’t get if you bought a Nasdaq ETF, such as drugmakers. Eli Lilly. Or Visa And MasterCardwhich have consistently outperformed the wider financial sector.

The Vanguard Growth ETF’s inherent structure means it should outperform the Nasdaq Composite and the S&P 500 if large-cap growth leads the market, which is exactly what will happen in 2023, 2024 and most of last year. happened five years ago.

Security

YTD total return

Total return over 1 year

Total return over 3 years

Total return over 5 years

Vanguard Growth ETF

11.2%

44.1%

39.9%

131.7%

Nasdaq Composite

9.3%

39.7%

39.9%

123.8%

S&P500

9.8%

33.5%

29.3%

102.8%

Data source: YCharts. YTD = year to date.

A “beautiful” concentration

More than 50% of the Vanguard Growth ETF is weighted in the “Magnificent Seven” stocks – a term coined by bank of America analyst Michael Hartnett to describe seven major technology-focused companies. The ETF has a much higher concentration in the Magnificent Seven than the SPDR S&P 500 ETF or even the Invesco QQQwhich reflects the performance of the Nasdaq-100. The Nasdaq-100 includes the 100 largest non-financial companies listed on the exchange.

Security

Microsoft

Apple

Nvidia

Amazon

Alphabet

Metaplatforms

Tesla

Vanguard Growth ETF

12.8%

11.2%

7.8%

6.9%

6.3%

4.5%

2.3%

Invesco QQQ

8.8%

7.4%

6.6%

5.2%

4.9%

4.9%

2.3%

SPDR S&P 500 ETF

7.2%

5.7%

5.4%

3.8%

3.7%

2.5%

1.1%

Data sources: Vanguard, Invesco, State Street Global Advisers.

The higher weightings in better-performing stocks such as Microsoft, Nvidia and Amazon compensated for the underperformance of higher-weighted stocks such as Apple, Alphabet and Tesla. As previously mentioned, the Vanguard Growth ETF has more flexibility in which stocks it can include, allowing it to take advantage of growth in different parts of the market.

You get what you wish for

The biggest drawback to the Vanguard Growth ETF is its valuation. Its price-to-earnings (P/E) ratio is a sky-high 41.6 compared to 36.3 for the Invesco QQQ and 26.2 for the SPDR S&P 500 ETF. You get an expensive valuation if you focus on premium-priced stocks, like most of the Magnificent Seven. However, P/E based on earnings over the past twelve months only tells part of the story.

Nvidia and Eli Lilly, which together make up a whopping 10.4% of the Vanguard Growth ETF, have very high price-to-earnings ratios. But analyst consensus estimates predict their profits will more than double over the next twelve months – which is why their forward price-to-earnings ratios are less than half of current price-to-earnings ratios.

NVDA PE Ratio ChartNVDA PE Ratio Chart

NVDA PE Ratio Chart

The valuations of Nvidia and Ely Lilly are a good lesson in why a growth-oriented ETF can seem so expensive in the short term, but is actually more reasonable if the profits pay off. Admittedly, there is a lot of uncertainty when it comes to relying on future profits. These are just projections, and a lot can go wrong within and outside a company’s control.

A good option if it suits your investment objectives

The Vanguard Growth ETF offers growth investors the complete package of diversification and high weightings in the market’s best growth stocks. With an expense ratio of just 0.04%, investing $1,000 in the fund would incur just $0.40 in annual fees.

The ETF just hit a new all-time high and is more expensive than it used to be. But investors should approach growth ETFs or growth stocks in general not based on their past earnings, but based on what the investment could return in the future.

The ETF is likely to remain more volatile than the S&P 500. But it’s worth considering if you want to invest in growth but don’t know where to start, or if you’re just looking for an easy way to exit your growth positions to expand without incurring high costs. costs of more expensive financial products.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. 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 spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, 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 Alphabet, Amazon, Apple, Bank of America, Mastercard, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends the following options: long January 2025 calls of $370 on Mastercard, long January 2026 calls of $395 on Microsoft, short January 2025 calls of $380 on Mastercard, and short January 2026 calls of $405 on Microsoft. The Motley Fool has a disclosure policy.

Here’s why Vanguard’s largest growth fund continues to outperform the S&P 500 and Nasdaq Composite was originally published by The Motley Fool

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