Which Is the Better ETF for Growth Stocks, Vanguard's VONG or iShares' IWO?

The Vanguard Russell 1000 Growth ETF (NASDAQ:VONG) focuses on large-cap leaders with lower costs, while the iShares Russell 2000 Growth ETF (NYSEMKT:IWO) targets smaller, more volatile growth companies with higher recent returns.

Investors seeking growth often choose between the stability of dominant large-cap leaders and the high-octane potential of smaller firms. While both funds target growth characteristics, their market cap focus leads to different volatility profiles. This comparison examines how a large-cap growth powerhouse matches up against a small-cap growth specialist, looking at whether higher recent returns justify the additional risk.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund is significantly more affordable, maintaining an expense ratio of 0.06% compared to the 0.24% charged by the iShares fund. This 0.18 percentage point gap means the iShares fund costs four times as much annually as its large-cap counterpart, which can impact total returns over long horizons. Both ETFs offer an identical trailing-12-month distribution yield of 0.4%.

Performance & risk comparison

The iShares Russell 2000 Growth ETF provides exposure to 1,093 small-cap stocks, focusing on healthcare at 25%, technology at 22%, and industrials at 21%. Its largest positions include Bloom Energy (NYSE:BE) at 3.71%, Credo Technology Group (NASDAQ:CRDO) at 1.79%, and Sterling Infrastructure (NASDAQ:STRL) at 1.38%. Launched in 2000, it has a trailing-12-month dividend of $1.51 per share and tracks smaller firms with high growth potential but often less established track records.

In contrast, the Vanguard Russell 1000 Growth ETF takes a more concentrated approach with 394 stocks, leaning heavily into technology at 51%, consumer cyclical at 13%, and communication services at 12%. Top holdings include NVIDIA (NASDAQ:NVDA) at 12.90%, Apple (NASDAQ:AAPL) at 11.61%, and Microsoft (NASDAQ:MSFT) at 8.80%. Launched in 2010, the fund has paid $0.56 per share over the trailing 12 months and emphasizes dominant large-cap firms that often have greater access to capital and more stable cash flows.

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What this means for investors

Investors seeking growth stocks can look to the iShares Russell 2000 Growth ETF (IWO) and Vanguard Russell 1000 Growth ETF (VONG) as an efficient way to gain this exposure. Deciding which to invest in comes down to a few key factors.

VONG seeks robust returns by targeting large-cap growth U.S. stocks. Since these are often found in the tech sector, this ETF is heavily weighted in that direction. While its one-year return isn’t as great as IWO’s, VONG’s focus on large caps contributed to its lower beta and max drawdown, since smaller companies are often more volatile than established businesses such as Microsoft. VONG is the superior choice for investors who want a low-cost means of gaining large-cap growth stock exposure, while limiting risk.

IWO takes a different approach to growth stocks by pursuing small caps. Smaller companies exhibit greater potential for business expansion compared to established players, which makes IWO’s strategy compelling. This also contributed to the ETF’s far better one-year performance compared to VONG.

Another of IWO’s strengths lies in its broader holdings of more than 1,000 stocks. Consequently, the fund possesses better diversification across industries, making it resilient against a downturn in a particular sector. However, it’s more expensive, and small-cap stocks hold higher volatility. IWO is for investors who want to target small-cap companies for their greater growth potential or to supplement a portfolio that already holds many of the large-cap stocks in VONG.

Robert Izquierdo has positions in Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Apple, Bloom Energy, Microsoft, Nvidia, and Sterling Infrastructure. The Motley Fool has a disclosure policy.