VUG vs. VTI: Which Vanguard ETF Is the Better Buy for Growth Stocks?

Investors are grappling with a big question right now: Are U.S. growth stocks overvalued? The artificial intelligence (AI) trade has driven massive gains for growth stock investors in the past few years, but there are reasons to wonder if that momentum can continue.

Recent Vanguard research projects that U.S. value stocks will outperform U.S. growth stocks over the next 10 years. Two low-cost Vanguard exchange-traded funds (ETFs) offering different approaches to investing in U.S. growth stocks are the Vanguard Growth ETF (NYSEMKT: VUG) and the Vanguard Total Stock Market ETF (NYSEMKT: VTI).

The Vanguard Growth ETF holds a tech-heavy targeted portfolio of 147 growth stocks, while the Vanguard Total Stock Market ETF offers a more diversified portfolio of 3,531 growth and value stocks. In the past year, the Vanguard Total Stock Market ETF has outperformed the Vanguard Growth ETF.

VUG Total Return Level data by YCharts

Let's compare these two low-cost Vanguard ETFs and see which could be a better choice for your portfolio.

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Vanguard Growth ETF: 147 growth stocks, 22 years of 12.08% annualized returns

The Vanguard Growth ETF is focused on America's largest growth stocks. Its portfolio is dominated by tech stocks, with the technology sector making up 69.2% of the fund.

The fund's top five stocks by weighting are Nvidia (12.6% of the fund), Apple (11.6%), Alphabet (10.3% of the fund combining Class A and Class C shares), Microsoft (7.6%) and Amazon (4.5%). Out of the top 10 holdings in this ETF, nine are major tech names, and No. 10 is pharma giant Eli Lilly (2.8% of the fund).

This growth stock ETF has a strong track record of performance. Ever since the fund's inception in January 2004, the Vanguard Growth ETF has delivered average annual returns (by net asset value) of 12.08%. The fund has delivered annualized returns (by net asset value) of about 13.2% over the past five years, 22.9% over the past three years, and 18.6% over the past year.

But over the past year, this growth stock ETF has underperformed the S&P 500. Is using this fund to take a relatively concentrated position in growth stocks still a good bet?

Vanguard Total Stock Market ETF: 3,531 stocks, 25 years of 9.5% annualized returns

If you still want to own growth stocks without relying too much on the tech sector, the Vanguard Total Stock Market ETF might be a good choice. This low-cost index fund holds 3,531 stocks and has delivered annualized returns of about 9.5% since its inception in May 2001.

The Vanguard Total Stock Market ETF has delivered average annual returns (by net asset value) of about 12.2% over the past five years, 20.4% over the past three years, and 23.2% over the past year.

This ETF's portfolio is not as tech-heavy, but it still holds a solid number of tech stocks. Its top sector weightings are technology (41% of the fund), industrials (12.5%), consumer discretionary (12.3%), financials (10%), and healthcare (9.1%). The top 10 stock holdings are all major tech names, and the top five are the same names in the same order as the other fund:

• Nvidia (6.3% of the fund)
• Apple (5.8%)
• Alphabet (5.15% combining Class A and Class C shares)
• Microsoft (3.8%)
• Amazon (3.2%)

These top five holdings in VTI make up about 24.3% of the fund. But the Vanguard Growth ETF is even more concentrated, with the top five holdings making up about 46.6% of its portfolio.

Why buy VTI instead of VUG?

If you're concerned that U.S. growth stocks are overvalued, buying the diversified Vanguard Total Stock Market ETF (which holds more than 3,500 stocks) could be a better bet. Both funds charge the same ultra-low expense ratio of 0.03%. But VTI looks cheaper; its 12-month trailing price-to-earnings (P/E) ratio is 25.98, which is about a 21% discount to the Vanguard Growth ETF's earnings multiple of 32.85.

The Vanguard Total Stock Market ETF can give you exposure to large-cap tech stocks while maintaining a diversified portfolio of mid-cap, small-cap, and value stocks. It might keep outperforming the Vanguard Growth ETF in the long run.

Ben Gran has positions in Vanguard Total Stock Market ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Eli Lilly, Microsoft, Nvidia, and Vanguard Growth ETF. The Motley Fool has a disclosure policy.