"Magnificent Seven" stocks have caught the market spotlight for their size, growth potential, and leadership across exciting themes. The group comprises Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla. But some investors may feel that Magnificent Seven stocks are overvalued, or they simply already own enough of them and are looking for something else.
Despite being a growth-focused exchange-traded fund (ETF), the Vanguard Mid-Cap Growth ETF (VOT 0.13%) does not include any Magnificent Seven stocks. Here's why this fund could be worth buying now if you're looking for growth outside of mega-cap and large-cap stocks.
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A mixed medley of growth stocks
Vanguard has many different low-cost funds. But many of them focus on large-cap stocks, like the Vanguard Growth ETF (VUG 0.09%) or the Vanguard Value ETF. The Vanguard Mid-Cap Growth ETF is unique because it includes smaller growth stocks that would normally be left out of a larger fund, or just be too low-weighted to make much of a difference.
The fund is also far less top-heavy than the Vanguard Growth ETF. The top 10 holdings in the Mid-Cap Growth ETF make up 16% of the fund, whereas the top 10 holdings in the Vanguard Growth ETF make up 58.8% of the fund. The Magnificient Seven stocks are all top 10 holdings in the Vanguards Growth ETF.
The Mid-Cap Growth ETF does a good job of diversifying beyond a handful of themes or companies. For example, the largest holding is electronic components manufacturer Amphenol, followed by aircraft component company TransDigm and renewable utility Constellation Energy. But Super Micro Computer and Coinbase Global are also top 10 holdings, and Palantir Technologies clocks in as the 13th largest holding. Smaller tech stocks like Trade Desk, Arista Networks, and Datadog are also holdings.
The top 50 holdings in the Mid-Cap Growth ETF have weightings between 0.8% and 2%. So not too big, but also large enough to mean something. Because the Vanguard Growth ETF is so top-heavy, its 50th largest holding has a mere 0.3% weighting, making the fund ebb and flow to the tune of the Magnificent Seven. In other words, it's not nearly as diversified because it doesn't have balanced weightings.
Sector breakdown
The Vanguard Mid-Cap Growth ETF targets growth in sectors that investors may not ordinarily consider the growth pockets of the market. Tech is the largest sector weight in the fund, but a close second is the industrial sector, which has a 20.9% weighting. The allocation by sector starkly contrasts with the Vanguard Growth ETF, which is 75% in tech and consumer discretionary. These are the only two sectors where the Growth ETF has a higher allocation than the Mid-Cap Growth ETF.
|
Sector |
Vanguard Mid-Cap Growth ETF |
Vanguard Growth ETF |
|---|---|---|
|
Technology |
23.2% |
56.2% |
|
Industrials |
20.9% |
8.9% |
|
Consumer Discretionary |
13.8% |
19% |
|
Health Care |
12% |
7.5% |
|
Financials |
7.4% |
2.5% |
|
Energy |
6.7% |
1.3% |
|
Real Estate |
6.7% |
1.5% |
|
Utilities |
2.9% |
0.2% |
|
Telecommunications |
2.8% |
0.8% |
|
Consumer Staples |
1.9% |
0.7% |
|
Basic Materials |
1.7% |
1.4% |
Data source: Vanguard.
As you can see in the table, the Growth ETF has negligible exposure (just 8.4%) to financials, energy, real estate, utilities, telecommunications, consumer staples, and basic materials combined.
Less emphasis on tech also gives the Mid-Cap Growth ETF a lower valuation. It has a 29.5 price-to-earnings ratio, compared to 39.9 for the Vanguard Growth ETF and 25.3 for the Vanguard S&P 500 ETF.
A good choice for investors seeking diversification
The Mid-Cap Growth ETF is a better alternative to the Growth ETF if you seek more diversification across various sectors and companies. It's also a good fit if you're looking to invest in growth but already own sizable positions in mega-cap growth stocks -- including those outside the Magnificent Seven like Salesforce or Adobe.
Despite its large number of holdings and specific focus, the Mid-Cap Growth ETF still sports an expense ratio of just 0.07%. For context, the Growth ETF has an expense ratio of 0.04% and the Vanguard S&P 500 ETF has a 0.03% expense ratio, or $3 for every $10,000 invested versus $7 for the Vanguard Mid-Cap Growth ETF.
Although we may think of Vanguard ETFs as being low-cost, simple funds, there are more intricate options like the Mid-Cap Growth ETF. Despite being more complex and diversified, the fund is still ultra-low-cost. Flipping through Vanguard's list of funds can help you find the ETF that is best for you while also ensuring you achieve the diversification you're looking for.
Overall, the balance of value and growth potential outside of the Magnificent Seven makes the Vanguard Mid-Cap Growth ETF an excellent choice for diversifying beyond well-known mega-cap names.