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The last week notwithstanding, growth stocks and the related exchange traded funds have had a rough go off things as of late. Using the growth-heavy Nasdaq-100 Index (NDX) as the bogey, that gauge concluded Monday 10.36% below its 52-week, putting it in correction territory.
That’s an improvement from NDX resided at the start of last week, but the point is the past few weeks have been challenging for large-cap growth equities and ETFs. In what could prove to be positive news over the medium- to longer-term, the recent retrenchment experienced by large- and mega-cap growth stocks could serve the aim of resetting, albeit modestly in some cases, valuations.
Plus, it cannot be ignored that the long-term outlook for many beloved growth companies is compelling and, broadly speaking, fundamentals in the group are stout. Those include some of the best balance sheets in Corporate America, increasing shareholder rewards and wide moats, among others.
Point is advisors and investors shouldn’t be dismissive of funds such as the Vanguard Growth ETF (NYSEARCA: VUG). VUG follows the CRSP US Large Cap Growth Index, which is different from the S&P 500 Growth Index. On the surface, the differences appear slight, but over time, they’re magnified as highlighted by the fact that VUG has beaten S&P 500 Growth-tracking rivals over the past three years.
VUG Particulars
Even when the parent benchmark is broad, cap-weighted large-cap growth indexes have a tendency to be highly concentrated, particularly during bull markets. VUG is concentrated as well as the ETF’s top 3 holdings – Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA) – combine for over 36% of the roster. Lack of diversification has helped VUG.
“Concentration is the most important risk potential investors should be aware of. However, investors across the large-growth landscape also grapple with this risk,” observes Morningsstar analyst Zachary Evens. “This fund has grown more concentrated along with its average Morningstar Category peer. The top 10 holdings of the typical large-growth peer represented 56% of assets at June’s end, up from about 52% a year ago. At that time, the fund’s top 10 holdings also collected 52% of assets.”
At the sector level, VUG is predictably concentrated as tech and consumer discretionary stocks combine for 77.50% of the fund’s roster. However, some of VUG’s 60.90% weight to tech is attributable to CRSP not acknowledging communications services as its own sector. That’s the group where Alphabet (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META), among others reside.
Even in the essence of index nerdiness, it’s likely if CRSP acknowledged communications, three sectors instead of two would represent about three-quarters of the VUG portfolio. That’s common across the spectrum of passive large-cap growth ETFs.
VUG Is Very Vanguard
Two of the biggest reasons why so many advisors and investors embrace Vanguard ETFs is that these products usually have straight-forward investment objectives and low fees.
VUG checks both boxes. It’s annual expense ratio of 0.04%, or just $4 on a $10,000 stake, is well below the category average of 0.95%, according to the issuer. Obviously, that helps with long-term performance.
“This fund’s performance has stacked up well against the category average since it adopted its current index in April 2013,” concludes Evens. “From that point through July 2024, the fund’s ETF share class beat the category average by 2.2 percentage points annualized. Concentration at the top of the portfolio contributed to greater volatility over this time, but not enough to cut into its risk-adjusted advantage.”
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