2 Stock-Split Vanguard Index Funds to Buy Now. History Says They Can Crush the S&P 500 as the AI Boom Unfolds.
Key Points
The Vanguard S&P 500 Growth ETF and the Vanguard Mega-Cap Growth ETF will undergo 6-for-1 stock splits on April 21.
These Vanguard index funds are heavily weighted toward the technology sector, and they crushed the S&P 500 during the cloud computing boom.
Artificial intelligence is the next inflection point for the technology sector, and it could lead to tremendous outperformance in these index funds.
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Vanguard founder John C. Bogle introduced the first index fund in 1976. In doing so, his goal was to provide investors with a more reliable path to creating wealth in the stock market as compared to buying stakes in individual companies. "Don't look for the needle in the haystack," he said. "Just buy the haystack."
Today, Vanguard remains a premiere issuer of index funds because it offers a broad range of low-fee options. But two funds are particularly attractive right now, partly because they will undergo 6-for-1 stock splits on April 21, making shares more affordable, and partly because they outperformed the S&P 500 (SNPINDEX: ^GSPC) in the last decade.
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I'm talking about the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) and the Vanguard Mega-Cap Growth ETF (NYSEMKT: MGK). Here's what investors should know.
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1. Vanguard S&P 500 Growth ETF
The Vanguard S&P 500 Growth ETF measures the performance of 140 S&P 500 companies classified as growth stocks based on three metrics: the 12-month percent change in share price, the three-year change in revenue per share, and the three-year change in earnings per share over current price.
Members of the S&P 500 whose scores in those three metrics rank among the top 33% of companies in the index (by market value) are classified as growth stocks. The five largest holdings in the index fund are as follows:
- Nvidia: 14.1%
- Alphabet: 10.7%
- Microsoft: 9.6%
- Apple: 6.4%
- Broadcom: 4.9%
As a caveat, while the Vanguard S&P 500 Growth ETF is diversified across more than 100 companies, the five largest positions still account for about 45% of its performance. High concentration can lead to volatility. But with an expense ratio of 0.07%, this index fund is a cheap and easy way to get exposure to some of the most influential companies in the world.
2. Vanguard Mega-Cap Growth ETF
The Vanguard Mega-Cap Growth ETF is a slightly more concentrated version of the S&P 500 Growth ETF. It measures the performance of 60 companies classified as growth stocks. The five largest holdings in the index fund are as follows:
- Nvidia: 13.1%
- Apple: 12.5%
- Alphabet: 10.1%
- Microsoft: 9.1%
- Meta Platforms: 4.6%
Here again, concentration risk is a concern. While the Vanguard Mega-Cap Growth ETF is diversified across 60 companies, the five largest positions account for nearly 50% of its performance. But with an expense ratio of 0.05%, this index fund is a cheap and easy way for risk-tolerant investors to get exposure to the largest growth stocks in the world.
Why these Vanguard index funds are likely to beat the S&P 500 in the next decade
The Vanguard index funds I've discussed are heavily concentrated in technology stocks. In fact, technology companies accounts for 47% of the S&P 500 Growth ETF and 67% of the Mega-Cap Growth ETF, which means their future returns are heavily tied to that market sector.
Cloud computing was the last major inflection point for technology stocks. By 2011, major companies such as Apple, Amazon, Google, and Microsoft had introduced cloud services, and countless software vendors had shifted toward web-based subscription business models (i.e., software-as-a-service).
What ensued over the next decade can be described as a cloud computing boom, and it led to tremendous outperformance in the technology sector. Consequently, between 2012 and 2021, the S&P 500 Growth ETF beat the S&P 500 by 109 percentage points, and the Mega-Cap Growth ETF outperformed the index by 148 percentage points
Artificial intelligence is undoubtedly the next major inflection point for the technology sector, but AI will likely have a more profound impact on the global economy. That means these Vanguard index funds could beat the S&P 500 by an even greater margin over the next decade.
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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, and Nvidia and is short shares of Apple. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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