Vanguard's Growth ETF Usually Beats the Market After a Lagging Year. I'd Own It, but Not for a 2027 Rebound.

The Vanguard Morningstar Growth ETF (NYSEMKT:VUG) set a record on Oct. 6, closing at $92.64. It has since slid about 6%, to roughly $87 as of this writing. The S&P 500 (SNPINDEX:^GSPC) is down less than 3% in the same stretch.

This leaves the growth fund up roughly 7% in 2026, versus about 11% for the index. If the gap lasts through December, it'd be the first calendar year since 2022 that the fund has trailed the S&P 500, on price alone.

I looked back through the fund's daily closes to 2005 to see what happened after the other years it lagged. It trailed the index in five full calendar years, and it beat the index the next year in four of them. But I don't think the history says as much as it seems to.

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What's holding growth back?

The fund relies on a few huge stocks, mainly tech companies, much more than the index does. At the end of September, its 10 biggest holdings were about 66% of its assets, according to Vanguard, versus about 41% for the Vanguard S&P 500 ETF.

And six of the 10 are lagging the S&P 500 this year, as of this writing. Microsoft and Amazon are up roughly 8% and 7%, respectively, while Alphabet is up just 2%. Meta Platforms is down about 3%, Broadcom is down about 7%, and Tesla is down about 17%. In all, the six were about a third of the fund's assets in September.

Through September, the fund lagged the index by only about a point. October made the gap far bigger. In one week in mid-October, 20 of the world's largest artificial intelligence (AI) and chip stocks lost over $1 trillion in market value. Investors worried about how much companies are spending on AI, and a hot inflation report added to the pressure.

Notably, Nvidia, the fund's top holding at around 13.5% of assets, now trades about 12% under its Oct. 6 close.

Interest rates are another drag. In September, the Federal Reserve lifted its benchmark rate a quarter point, to a range of 3.75% to 4%, citing elevated inflation. Higher rates can hit growth stocks hardest, because their value tends to hinge on profits expected years out.

Four comebacks in five tries

The fund lagged the S&P 500 in 2006, 2008, 2016, 2021, and 2022. It then beat the index by around 8 percentage points in 2007, 11 points in 2009, 7 points in 2017, and 22 points in 2023.

The miss was in 2022. After barely trailing in 2021, the fund fell around 34% that year, against about 19% for the index.

That was the year the Fed hiked its benchmark rate from near zero to a range of 4.25% to 4.5%.

Of course, the size of the gaps varied a lot. In 2008 and 2021, the fund trailed by only about 0.2 percentage point.

The two clear lags, 2006 and 2016, missed by about 5 points each, and both were followed by a strong year for growth. This year's gap is also roughly 5 points so far. But two cases aren't much to go on.

Growth usually wins anyway

The bigger catch is that the fund beats the S&P 500 in most years. It finished ahead in 16 of the 21 full calendar years from 2005 to 2025, a win rate of around 76%.

After lag years, it was four in five, or 80%.

In other words, a win after a lag year looks a lot like the fund's usual pattern rather than a special signal.

A buyer also pays up for that growth. Vanguard put the fund's price-to-earnings ratio at 32.1 at the end of September, versus 24.7 for its S&P 500 ETF. With the fund off around 4% since then, it costs about 31 times earnings today.

Does the record make the fund a buy? Not by itself. By Vanguard's measure, the fund's stocks have grown earnings around 34% a year, against about 25% for those in its S&P 500 ETF. This faster growth is arguably what a buyer is paying about 31 times earnings for.

I'd feel fine owning the fund for the long haul at today's price. I just wouldn't rely on 2027 to erase this year's gap, because one year of lagging the market became two in 2022.

Daniel Sparks has clients with positions in Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Morningstar Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.