Reasons Behind Vanguard’s Largest Growth Fund’s Continued Outperformance of S&P 500 and Nasdaq Composite

Reasons Behind Vanguard’s Largest Growth Fund’s Continued Outperformance of S&P 500 and Nasdaq Composite

We are only one quarter into 2024 and already the Nasdaq Composite And S&P500 are up more than 9% since the start of the year. But Vanguard’s largest growth-focused exchange-traded fund (ETF) is rising even more.

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

Reasons Behind Vanguard’s Largest Growth Fund’s Continued Outperformance of S&P 500 and Nasdaq Composite

Image source: Getty Images.

Designed to keep winners racing

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

Although the Nasdaq generally includes younger, more growth-oriented companies, the New York Stock Exchange has some high-profile growth stocks that you wouldn’t get if you bought a Nasdaq ETF, like a drugmaker. Elie Lilly. Or Visa And MasterCardwhich have consistently outperformed the financial sector as a whole.

The Vanguard Growth ETF’s inherent structure means that it should outperform the Nasdaq Composite and the S&P 500 if large-cap growth dominates the market, which is precisely what has happened in 2023, 2024 and for most of last five years.

Security

Total return since the beginning of the year

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. Year to date = year to date.

A “magnificent” concentration

More than 50% of the Vanguard Growth ETF is weighted in stocks of the “Magnificent Seven” – 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 in the SPDR S&P 500 ETF or even the Invesco QQQwhich reflects the performance of the Nasdaq-100. The Nasdaq-100 covers the 100 largest publicly traded non-financial companies.

Security

Microsoft

Apple

Nvidia

Amazon

Alphabet

Metaplatforms

You’re here

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 outperforming stocks like Microsoft, Nvidia and Amazon offset the underperformance of top-weighted stocks like Apple, Alphabet and Tesla. As mentioned earlier, the Vanguard Growth ETF has more flexibility in what stocks it can include, allowing it to take advantage of growth in different pockets of the market.

You get what you wish for

The biggest downside to the Vanguard Growth ETF is its valuation. The price-to-earnings (P/E) ratio is at a high of 41.6, compared to 36.3 for the Invesco QQQ and 26.2 for the SPDR S&P 500 ETF. A high valuation is what you get with a high concentration on high-priced stocks – like most of the Magnificent Seven. However, the P/E based on trailing 12 month earnings only tells part of the story.

Nvidia and Eli Lilly, which collectively represent 10.4% of the Vanguard Growth ETF, have very high P/E ratios. But analyst consensus estimates call for their earnings to more than double over the next 12 months, which explains why their forward P/E ratios are less than half of current P/E 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 look so expensive in the short term, but is actually more reasonable if earnings are there. Certainly, there is a lot of uncertainty when it comes to betting on forecast profits. These are just projections, and a lot can go wrong, within or outside of a company’s control.

A good option if it matches your investment goals

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

The ETF just hit a new all-time high and is more expensive than before. But investors shouldn’t approach growth ETFs or growth stocks in general based on their past earnings, but rather based on what the investment might bring in the future.

The ETF will likely continue to be 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 are just looking for an easy way to increase your holdings growth without incurring high costs. fees for 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 spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive 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 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls 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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