Vanguard Growth Index VUG effectively represents the contours of the large-cap growth market, but that means it holds a highly concentrated portfolio. Its low cost helps remedy that shortcoming and makes it a compelling option.
The fund tracks the CRSP US Large Cap Growth Index, a market-cap-weighted bogy that captures the growth-oriented side of the large-cap market. Market-cap-weighting is an efficient way to size holdings because it harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio while shrinking companies that may be struggling will have less importance. Generous buffers around the fund’s size and style borders improve the breadth of the portfolio and help tame turnover, leading to reduced trading costs.
Investors’ lofty expectations can lead to high valuations for growth stocks. Few companies currently match the positive sentiment embedded in the stock prices of technology giants Microsoft MSFT, Nvidia NVDA, and Apple AAPL. These three stocks represented 36% of the portfolio as of June 2024. The fund’s top 10 holdings, which include other behemoths like Amazon.com AMZN and Meta META, collected 60% of its assets.
Concentration is the most important risk potential investors should be aware of. However, investors across the large-growth landscape also grapple with this risk. 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.
The market’s largest stocks heavily influence this fund’s return and risk. That can be a boon or a burden. With so much riding on the largest stocks in the market, the fund should do well when those stocks outperform and suffer when they fall. For example, the exchange-traded fund share class gained 66% since the beginning of 2023, while its average peer gained 52%. But weak performance from the heaviest hitters spelled a 33% drawdown in the bear market of 2022, 3 percentage points more than its average peer. Long term, investors should expect periods of outperformance when the largest stocks lead the charge. But those stocks can leave the portfolio vulnerable from time to time, potentially resulting in greater losses than better-diversified peers during broad declines.
Vanguard Growth ETF: Performance Highlights
This fund’s performance has stacked up well against the category average since it adopted its current index in April 2013. 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.
Overweighting mega-cap stocks like Apple and Nvidia helped performance over the five years through July 2024. In aggregate, focusing on the largest growth stocks proved beneficial, but it should not be counted on as a reliable source of outperformance.
Despite some differences, the fund remains a good representative of the large-cap growth category and should perform well when growth stocks are in favor. Diversifying across the market’s largest and strongest helps control risk. Additionally, its low fee presents a durable advantage going forward.
