This Vanguard ETF has risen 40% in twelve months. Is it a no-brainer purchase now?

By | April 13, 2024

Many investors might think that Exchange Traded Funds (ETFs) are like the tortoise and the hare in Aesop’s fable about the race between these two unlikely competitors. According to them, ETFs can win the long-term race by plodding along slowly and steadily.

This stereotype may be true for some ETFs. However, there are exceptions. One Vanguard ETF is up 40% in the past twelve months.

A mega winner

Which ETF has achieved such an impressive performance? The Vanguard Mega Cap Growth Index Fund ETF (NYSEMKT: MGK). As the name implies, this Vanguard fund owns mega-cap stocks (with a market capitalization of $200 billion or more) with exceptional growth prospects.

The Vanguard Mega Cap Growth Index Fund ETF currently has positions in 82 stocks. The average market capitalization of these stocks is $1.3 trillion. The stocks in the ETF’s portfolio have delivered average annual earnings growth of 19% over the past five years.

Despite its massive returns over the past twelve months, this Vanguard ETF hasn’t started its winning streak lately. Since its inception in December 2007, the fund has generated an average annual return of 12.72%. Over the past five years, it has increased by an average of 19% annually.

With the Vanguard Mega Cap Growth Index Fund ETF, you don’t have to worry about fees eating into your profits. The annual expense ratio is a low 0.07%. The average expense ratio of comparable funds is more than 13 times higher, namely 0.96%.

Why This Vanguard ETF Keeps Rising

There’s a simple reason why this Vanguard ETF has risen so much and continues to rise. Many of the shares the company owns were sizzling hot.

For example, Microsoft is the largest holding for the Vanguard Mega Cap Growth Index Fund ETF. The tech giant’s shares have risen nearly 50% in the past 12 months, fueled by a generative AI boom.

AI has been a key driver for several other top stocks in the ETF. The third largest position, Amazon, has risen by more than 80%. Shares of Nvidia, the ETF’s fourth largest holding, have more than tripled in value. Number 5, Metaplatforms, has jumped almost 140% higher. Number 6, Alphabetis up almost 45%.

The Vanguard Mega Cap Growth Index Fund ETF doesn’t just own technology stocks. Medicine maker Eli Lilly is the fund’s sixth largest holding. These big pharmaceutical stocks have more than doubled in the past twelve months.

Is the Vanguard Mega Cap Growth Index Fund ETF a no-brainer purchase?

With its strong momentum, the Vanguard Mega Cap Growth Index Fund ETF may seem like a no-brainer purchase right now. Is the? I wouldn’t go that far. There are two possible disadvantages to consider.

First, valuation could become an issue with the ETF. The average price-to-earnings ratio for stocks in the fund’s portfolio is a sky-high 38.3. Granted, many of the stocks owned by the ETF are growing quickly. Still, a cursory look at the future earnings multiples of the ETF’s top holdings shows that they aren’t cheap.

Second, the Vanguard Mega Cap Growth Index Fund ETF doesn’t offer as much diversification as many other Vanguard ETFs. No less than 58.7% of the fund is invested in technology shares. Another 21.2% is in consumer durable stocks. This concentration in two sectors could be problematic during an economic downturn.

Nevertheless, I think this Vanguard ETF is an excellent choice for long-term investors. However, you will still have to use your brain before buying it.

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Suzanne Frey, a director at Alphabet, 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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights holds positions at Alphabet, Amazon, Meta Platforms and Microsoft. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

This Vanguard ETF has risen 40% in twelve months. Is it a no-brainer purchase now? was originally published by The Motley Fool

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