Why Stacking This Growth ETF on Top of VOO May Work Against You

More and more investors of all stripes are pouring into exchange-traded funds (ETFs), and the tape tells that tale. Goldman Sachs recently noted that in the first six months of 2026, more than $1 trillion flowed into ETFs trading in the U.S., putting the industry on pace for north of $2 trillion in annual inflows this year. That would be a 40% surge from the record notched last year.

These two Vanguard ETFs are great on their own, but it's a mistake to pair them. Image source: Getty Images.

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One of the primary drivers of retail investors' affinity for ETFs is convenience. Just look at the Vanguard S&P 500 ETF (NYSEMKT: VOO). Indeed, the VOO ETF, the world's largest ETF, is convenient. What's not to like about 505 stocks under one umbrella?

On the other hand, as with individual stocks, it can be advantageous for many investors, especially those with extended time horizons, to own multiple ETFs. It's merely the principle of diversification that famous investors have preached for decades, being applied to ETFs.

On that note, market participants should be careful if they're considering uniting an S&P 500 fund with the Vanguard Morningstar Growth ETF (NYSEMKT: VUG) in their portfolios.

Embrace diversification, not duplication

The $227 billion Vanguard Morningstar Growth ETF, which tracks the Morningstar US Large Cap Growth index, is one of several cost-effective, solid growth equity ETFs in the Vanguard stable. Obviously, its name implies that it's a growth fund, and that bears remembering. Here's why.

Typically, S&P 500-tracking funds are considered "blend" funds, meaning they feature exposure to both growth and value stocks. Under the letter of the style box law, the Vanguard S&P 500 ETF is a blend fund, but investors considering pairing it with the growth ETF can't stop there. If they do, they risk building a portfolio short on diversification and long on funds that make similar moves.

As the chart below indicates, the Vanguard growth ETF trounced its S&P 500 relative over the past decade, but the ETFs largely did the same over the same period. Said another way, when the S&P 500 zigged, the VUG ETF didn't zag. It zigged, too.

VOO Total Return Level data by YCharts

It's easy to understand why that happened. Put simply, these two ETFs hold a lot of the same stocks, 118 to be exact. The overlap between these two Vanguard funds is 57%. That means diversification isn't achieved when these two ETFs are paired.

In simple terms, holding these two ETFs together means doubling up on many of the same stocks. For example, Nvidia and Apple combine for 25.4% of the Vanguard Growth ETF and 14.6% of the S&P 500 fund. If those stocks decline, these ETFs will follow suit. It's just a matter of how much; simultaneous ownership of both funds carries significant risk and offers little diversification.

Decision time

The takeaway here is that the Vanguard S&P 500 ETF and the Vanguard Morningstar Growth ETF aren't a match made in heaven because the funds hold too many of the same stocks, meaning investors need to pick between the two, and "both" isn't the right answer.

For those opting for the growth fund, potential complements include value stocks or funds, small-cap funds, and low-volatility strategies, among other ideas.

Investors who "VOO and chill" have been known to add international and small-cap stocks and ETFs to diversify portfolios that lean into the Vanguard S&P 500 ETF. At the end of the day, many satellite positions can diversify portfolios holding one of these Vanguard ETFs.

Todd Shriber has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Nvidia, Vanguard Morningstar Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.