VUG vs. IWO: Is Large-Cap Growth or Small-Cap Diversification a Better Choice for Investors?

The Vanguard Growth ETF (NYSEMKT:VUG) stands out for its ultra-low fees, mega-cap focus, and stronger recent returns, while the iShares Russell 2000 Growth ETF (NYSEMKT:IWO) offers diversified access to small-cap growth companies and greater sector balance.

Both funds target U.S. growth stocks, but their approaches differ sharply: VUG tracks large, established growth companies, while IWO zeros in on smaller, faster-growing firms. This match-up pits blue chip growth against the high-potential, high-volatility small-cap universe.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500. The 1-yr return represents total return over the trailing 12 months.

VUG charges a much lower expense ratio than IWO, which could add up over time for cost-conscious investors. IWO, on the other hand, offers a higher dividend yield, giving it an edge for those seeking additional income from their investments.

Performance & risk comparison

What's inside

VUG allocates over half of its portfolio to technology stocks, with major weights in communication services and consumer cyclicals as well. The fund holds 160 stocks, with top positions in Nvidia, Apple, and Microsoft. This concentration in tech giants means performance can hinge on a handful of large companies, especially when those names rally or stumble.

IWO, in contrast, divides assets more evenly across technology, healthcare, and industrials. Its top holdings -- Bloom Energy, Credo Technology Group, and Fabrinet -- each represent less than 2% of assets, so no single company dominates. This small-cap fund may appeal to those seeking broader sector exposure and less company-specific risk, though it comes with higher volatility.

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What this means for investors

While VUG and IWO both target growth stocks, they differ significantly in their overall strategies and portfolios.

VUG focuses on industry-leading behemoths. It only contains large-cap stocks, and its top three holdings combined make up just over one-third of the entire portfolio. That can serve this fund well when those particular stocks are thriving -- as they have been over the last few years -- but it could also lead to greater volatility if they face a rough patch.

IWO, on the other hand, targets a much wider variety of small-cap stocks. It contains over 1,000 holdings, providing much greater diversification compared to VUG's 160 stocks. With the top three holdings only making up around 4% of total assets, it's also less tilted toward specific stocks.

While IWO has the advantage in terms of sheer diversification, small-cap stocks tend to be more volatile than their large-cap counterparts. Small corporations, in general, can be prone to wild price swings, as seen with IWO's higher beta and steeper max drawdown over the last five years. But this fund could also be poised for explosive growth if any of the stocks become superstar performers.

In weighing the advantages of each of these funds, consider your goals and risk tolerance. VUG can be less risky in the sense that it only contains large-cap industry leaders, but it's heavily tilted toward a relatively small number of stocks. IWO's small-cap focus may result in greater volatility, but it's also much more diversified in both its top holdings and sector allocations.

Glossary

ETF: Exchange-traded fund; a basket of securities traded on an exchange like a stock.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Small-cap: Companies with a relatively small total market value, typically under $2 billion.
Mega-cap: Companies with extremely large market values, often over $200 billion.
Beta: A measure of a security's volatility compared to the overall market, usually the S&P 500.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Dividend yield: Annual dividends paid by a fund or stock divided by its current price, expressed as a percentage.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a period.
AUM: Assets under management; the total market value of assets a fund manages for investors.
Sector exposure: The proportion of a fund's assets invested in specific industries or sectors.
Company-specific risk: The risk that events affecting a single company will impact a fund's performance.

Katie Brockman has positions in Vanguard Index Funds - Vanguard Growth ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard Index Funds - Vanguard Growth ETF. 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.