This Growth ETF Has Crushed the S&P 500 Since 2004. Here's Why It's Still a Buy.
Key Points
The Vanguard Morningstar Growth ETF (VUG) is concentrated in tech, but holds industry leaders from other major sectors.
VUG has averaged 10.6% annual returns since its January 2004 inception.
VUG has bounced back from all three bear markets it has experienced.
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For a growth investor, the goal of any investment, whether an individual stock or ETF, should be to grow as much as possible. However, when it comes to comparisons, the S&P 500 (SNPINDEX: ^GSPC) remains the benchmark for measuring performance.
One ETF that has routinely outperformed the S&P 500 since it began trading in January 2004 is the Vanguard Morningstar Growth ETF (NYSEMKT: VUG). In that time, it's up 895% compared to the S&P 500's 539%. Only time will tell what the future holds, but signs point to that trend continuing.
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Tech has led its outperformance
VUG holds 135 large-cap growth stocks across all major sectors, but it's heavily concentrated in tech (72.1%). That checks out given its growth focus, but it also helps to have a hedge in other sectors. All of its top 10 holdings are tech companies (including the "Magnificent Seven" stocks), but its top 20 includes blue chip stocks like Eli Lilly, Visa, Mastercard, and Costco Wholesale.
The high concentration in tech means when it's good, it's great, but when it's bad, it can be terrible. Luckily, it's been much more on the great side. Here's how its returns compare to the S&P 500's over different time spans:
| Investment | 3-Year Annual Average | 5-Year Annual Average | 10-Year Annual Average | Annual Average Since VUG's Inception |
|---|---|---|---|---|
| VUG | 20.7% | 8.9% | 16.5% | 10.6% |
| S&P 500 | 19.1% | 9.4% | 13.5% | 8.5% |
Source: YCharts. Averages as of market close on Nov. 6.
VUG has shown resilience
With VUG down 11% in the past month, and the Nasdaq Composite officially in correction territory as of market close on Nov. 6, investors may wonder whether now's the time to invest, with bear market fears looming and uncertainty high.
While we can't predict how the market will move (particularly in the short term), I trust VUG to weather the storm. It has experienced three bear markets -- the financial crisis, the COVID-19 pandemic, and the 2022 bear market -- and bounced back from each:
| Bear Market | Peak to Trough Decline | Returns Since Trough |
|---|---|---|
| Financial crisis | (36%) | 1,420% |
| COVID-19 | (32%) | 259% |
| 2022 bear market | (51%) | 137% |
Data source: YCharts. Returns are based on VUG's $82.17 closing price on Nov. 6. Percentages rounded to the nearest whole percent.
Past results don't guarantee future performance, so we can't assume it will continue. However, the companies leading the way in VUG are built to succeed over the long haul. That doesn't mean there won't be hiccups and rough patches along the way (there absolutely will be), but the long-term trajectory matters much more than the short-term surges or plunges.
I wouldn't invest a lump sum in VUG right now because of the volatility, but it's a good time to start a stake or slowly add to an existing position.
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Stefon Walters has positions in Visa. The Motley Fool has positions in and recommends Costco Wholesale, Eli Lilly, Mastercard, Vanguard Morningstar Growth ETF, and Visa. The Motley Fool has a disclosure policy.
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