This Unstoppable Vanguard ETF Has Crushed the S&P 500 Over the Last Decade. Is It a Buy Right Now?
Key Points
Growth ETFs have been hot properties over the past few years.
The Vanguard Growth ETF usually gets the most attention from that company's lineup.
But the Vanguard Russell 1000 ETF has performed better over the long term.
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The S&P 500 (SNPINDEX: ^GSPC) has delivered fantastic returns over the past decade. Growth and tech stocks have done unquestionably better.
Vanguard isn't necessarily well known for its more aggressive equity offerings, but it does have a few on its roster. The Vanguard Growth ETF and the Vanguard Information Technology ETF are probably the most popular. But there's another with an equally impressive track record that flies below the radar of those two.
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The Vanguard Russell 1000 Growth ETF (NASDAQ: VONG) follows a similar strategy to the Vanguard Growth ETF but pulls stocks from a bigger starting universe. The result is a little less tech exposure and a little less concentration at the top of the portfolio.
That would be appealing to investors looking to cast a wider net on this market.
Image source: Getty Images.
How VONG constructs its portfolio
This fund tracks the Russell 1000 Growth Index. It applies growth screens, including higher price-to-book ratios, higher two-year forecast growth, and higher historical five-year sales growth. From there, it creates a composite score to identify the companies with better overall growth characteristics.
As is the case with most growth ETFs today, it tilts heavily toward tech stocks. I don't love the concentration, but it is an accurate representation of where growth is coming from, both in terms of revenue and earnings.
The combination of historical and forecast growth metrics is interesting, but perhaps not in the best way. Using forecast measures, while there is some projection involved, generally does a better job of identifying where the company is going. Historical measures just tell us where the company has been and may not be the best reflection of the future.
Currently, that's only a minor consideration since performance over the past few years aligns with forecast conditions.
VONG vs. VUG: Performance & key metrics
| Metric | VONG | VUG |
|---|---|---|
| Expense ratio | 0.06% | 0.03% |
| Assets under management | $43.9 billion | $222.6 billion |
| Weighting methodology | Market cap | Market cap |
| 1-year total return | 22% | 24.9% |
| 5-year annual total return | 14.3% | 14.1% |
| 10-year annual total return | 18.5% | 18.2% |
| # holdings | 387 | 154 |
| Top 10 concentration | 59.7% | 64.7% |
| Median market cap | $2.1 trillion | $2.1 trillion |
| Top sectors | Tech (64%), consumer discretionary (16%), industrials (8%) | Tech (70%), consumer discretionary (15%), industrials (7%) |
Data source: Vanguard.
The metrics used to define growth are a little different, but they produce very similar results. The biggest difference is that the Vanguard Russell 1000 Growth ETF uses a starting universe of around 1,000 stocks, while the Vanguard Growth ETF uses a universe of roughly 450 stocks.
That expansion into mid-cap territory gives the Vanguard Russell 1000 Growth ETF a lower top 10 concentration and a lower tech allocation. Since both funds use a market cap-weighting methodology, the median market cap is about the same, and there's only a slight tilt toward smaller companies overall.
I prefer the better diversification and lower concentration from the Vanguard Russell 1000 Growth ETF in the current environment. Granted, the differences are small and correlation of performance will be high, but I think reducing megacap tech exposure at this point is wise. There are enough economic question marks that even one disappointing trend could derail the tech rally.
Plus, that diversification has proven useful in historical returns: The Vanguard Russell 1000 Growth ETF has outperformed over the past decade.
In the current market, I believe a tilt toward less concentration is better. That gives this ETF the slight edge.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Growth ETF. The Motley Fool has a disclosure policy.
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