Vanguard Morningstar Growth ETF vs. Vanguard Information Technology ETF: Here's Which One I Believe Is the Clear Long-Term Winner.
Key Points
Nvidia, Apple, and Microsoft are the leading positions in each of these ETFs.
The Vanguard Information Technology ETF’s trailing-10-year total return of 775% is well ahead of the Vanguard Morningstar Growth ETF’s 420% total return.
Investors who have a longer time horizon and a greater appetite for risk don’t need to think twice about what direction to go in.
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Picking individual stocks requires time and effort. And investors must possess a certain level of analytical capability to do this successfully. This isn't a viable option for many people.
Another way to invest in the stock market is to buy exchange-traded funds (ETFs). According to Investment Company Institute, there are thousands of U.S. ETFs to choose from. They provide exposure to different asset classes, sectors, geographies, and themes. And they trade as stocks do.
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The Vanguard Morningstar Growth ETF (NYSEMKT: VUG) and Vanguard Information Technology ETF (NYSEMKT: VGT) are two high-powered equity options. They have performed well in the past. Between these two investment vehicles, here's which one I believe is the clear long-term winner.
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Investors will own plenty of growth stocks
The Vanguard Morningstar Growth ETF gives investors a simple way to own America's biggest growth stocks. It tracks the Morningstar U.S. Large Cap Growth Index. This index screens large U.S. companies that post fast sales and earnings growth. The fund holds 135 different businesses.
Concentration deserves attention. The top three holdings are Nvidia, Apple, and Microsoft. The top 10 positions account for 63% of the ETF's total assets. The technology sector, at 72%, features most prominently.
The Vanguard Information Technology ETF provides more targeted exposure. It focuses exclusively on the U.S. technology sector. It tracks the MSCI US Investable Market Information Technology 25/50 Index, which contains tech companies of all sizes. The fund holds 318 stocks.
Investors should also consider its concentration. It's probably no surprise that Nvidia, Apple, and Microsoft are also the top three positions, combined representing 45% of the ETF. By specific industry, semiconductor stocks are the standout. It's not even close, as they have a 38% weighting.
As for cost, the Vanguard Morningstar Growth ETF wins. It charges an expense ratio of 0.03%. That's one-third the price charged by the Vanguard Information Technology ETF (0.09%).
Historical performance dramatically favors one ETF
When choosing between two ETFs, investors probably care most about performance. After all, returns show how much wealth can be built over time. That's a headline data point that's impossible to overlook.
In the past decade, the Vanguard Morningstar Growth ETF produced a total return of 420% (as of Oct. 21). This is an impressive showing. It's nearly 100 percentage points ahead of the S&P 500 (SNPINDEX: ^GSPC).
But the Vanguard Information Technology ETF's performance is vastly superior. Its trailing decade total return was 775%. A hypothetical $10,000 investment would be worth almost $88,000 today.
Both ETFs have benefited greatly from the artificial intelligence (AI) boom. As discussed, their top three holdings are similar. The difference is that the Vanguard Information Technology ETF has a stronger concentration in these three companies. Nvidia, which has soared 12,910% over the last 10 years, accounts for 17.6% of the portfolio, significantly higher than the Vanguard Morningstar Growth ETF's 13.5% weight.
It's hard not to bet on technology companies
Looking at historical data, the winner is clear. But investors care more about what the future will bring. When figuring out which ETF to add to your portfolio, it goes without saying that adopting a long-term mindset is critical.
If you have 30 years until retirement, as I do, you can afford to take on greater risk. I choose the Vanguard Information Technology ETF. While the Vanguard Morningstar Growth ETF provides more sector diversification, it has been incredibly lucrative to bet on technology companies.
Investors who agree with this line of thinking but don't want to be too aggressive can allocate 5% to 10% of their portfolios to the Vanguard Information Technology ETF. Controlling exposure will also make it easier to navigate volatility, helping you stay invested.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard Morningstar Growth ETF. The Motley Fool has a disclosure policy.
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