Vanguard is one of the world’s largest investment advisors and asset managers. Its size allows it to charge very low fees for financial products. THE Vanguard Growth ETF (NYSEMKT:VUG) has $235 billion in net assets and charges an annual expense ratio of 0.04%, which would represent $94 million in fees paid to Vanguard. But for an individual who invests $20,000 in the exchange traded fund (ETF), that’s just $8 in annual fees. It’s a win-win situation for Vanguard and investors.
The ETF has gained more than 20% so far this year and a staggering 135% gain over the past five years, and it continues to beat the S&P500 And Nasdaq Composite. Here’s why it’s worth buying now.
Simple but effective
Vanguard offers 86 ETFs. Some focus on stocks, while others include bonds, Treasuries, and a variety of other products. But only two stock funds have an expense ratio of 0.03%: the Vanguard S&P 500 ETF (NYSEMKT: VOL) and the Vanguard Total Stock Fund (NYSEMKT:VTI). Only four stock funds have an expense ratio of 0.04%. The Vanguard Growth ETF is one of them, and the others are Vanguard Value ETF (NYSEMKT:VTV), Vanguard Large Cap ETF (NYSEMKT:VV)and the Vanguard Mid-Cap ETF.
The biggest advantage of these very low cost funds is their simplicity. Of these six funds, the Vanguard Growth ETF has been (by far) the best performer this year, over the past three years, five years, and 10 years. This has been one of the easiest and easiest ways to beat the market. And there is reason to believe this trend could continue.
Bet on the best ideas
Growing businesses tend to be more volatile than value and income-oriented companies, because their valuations are based on the profits they could produce in the future rather than what they produce now. Investors are often willing to pay for a promising company. But if it fails to deliver on its promises and there isn’t a strong foundation, the hot air evaporates and can lead to a selloff.
Companies with high-quality earnings growth and a premium valuation can generate outsized gains in the stock market.
Apple, Microsoft, Nvidia, Amazon, AlphabetAnd Metaplatforms all have excellent balance sheets and very efficient business models. But they also have ample opportunities to deploy capital into innovative ideas. In other words, they have the proven qualities that investors look for in a blue-chip company and the upside potential that can demand a premium valuation.
In comparison, there are only a limited number of products like those of a consumer packaged goods company. Procter & Gamble can develop or acquire before becoming reckless. And there is limited innovation in new detergent or toothpaste formulas before those expenses can be better used elsewhere. This is why so many established companies pay dividends.
If you look through the list of S&P 500 companies, you’ll find many top-heavy, low-growth companies with cheap valuations because they’re losing out to competition, are poorly managed, or simply don’t have the opportunities to profit growth above the market. . The largest growing companies combine size and opportunity. This is why many high-growth companies do not pay dividends or prefer to buy back shares.
Capital directly reinvested in the company or indirectly through buybacks creates a snowball effect, where earnings per share increase through higher net income and fewer shares. If a company continues to allocate its capital well and manage its operations efficiently, it is virtually unstoppable in the long term.
Take the good and the bad
There are many poorly performing growth stocks in the Vanguard Growth ETF. Some are experiencing a glut of innovation, while others are losing their competitive edge. Some growth stocks are popular and expensive; others are cheap and out of favor. The advantage of a product like the Vanguard Growth ETF is diversification across multiple market sectors.
Gains from innovative new firms can offset the underperformance or losses of incumbent firms that are displaced. In other words, the Vanguard Growth ETF has a lot of losers, but also a lot of winners. And since no one knows which growth companies will outperform the market and which will underperform, it can be a winning strategy to cast a wide net.
In its simplest form, the Vanguard Growth ETF is a bet on sustained growth in the U.S. economy, rather than a select number of companies that are doing very well.
The most effective approach might be to pair a passive strategy like a Vanguard ETF with individual securities. This way, you can add additional exposure to your most compelling ideas without completely missing the boat on certain themes. If you hadn’t been exposed to the themes of mega-cap growth or artificial intelligence, it would have been very difficult to beat the market over the last 18 months or so.
Automate your investment strategy
Growing wealth over time requires developing saving habits as much as making wise investments. It can be helpful to have individual companies or evergreen ETFs that you can invest new savings into if you don’t have a high-conviction idea.
It’s especially difficult to deploy new capital when stock prices are falling everywhere. In these periods, the Vanguard Growth ETF can be particularly effective because it is diversified and is not vulnerable to the same company-specific risks that can be amplified during a true recession. For example, growth stocks have been hit hard in 2022. But if you bought the Vanguard Growth ETF at the end of this year, you’d be up 74% since then.
This is yet another example of why investing and holding stocks during periods of volatility predominates over the long term.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. 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 has positions and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Total Stock Market ETF, Vanguard Index Funds-Vanguard Value ETF, and Vanguard S&P. 500 ETFs. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
$20,000 in this Vanguard ETF costs just $8 in annual fees and it beat the S&P 500 and Nasdaq Composite in 2024 was originally published by The Motley Fool
