The Magnificent Seven have captivated markets this year, and for good reason. The term, coined by Bank of America analyst Michael Hartnett, is used to describe Apple (AAPL 0.41%), Microsoft (AAPL 0.41%), Alphabet (GOOG 5.33%) (GOOGL 5.59%), Amazon (AMZN -0.46%), Nvidia (NVDA -2.69%), Meta Platforms (META 0.94%), and Tesla (TSLA 2.87%).

Combined, these companies have a market cap of $11.83 trillion. And all seven stocks are beating the market so far year to date, from Apple's 46.7% year-to-date (YTD) gain to Nvidia's blistering 242.3% YTD gain.

The Vanguard Growth exchange-traded fund (ETF) (VUG -0.11%) includes 221 stocks, but the Magnificent Seven make up just over half of the fund's allocation. Here's why the ETF is a good way to invest in the Magnificent Seven, as well as other parts of the market.

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A magnificent year

The Vanguard Growth ETF has nearly double its exposure to the Magnificent Seven as the Vanguard S&P 500 ETF (VOO -0.28%), which is a near mirror image of the S&P 500.

Company

% Of Vanguard Growth ETF

% of Vanguard S&P 500 ETF

Apple

13%

7.09%

Microsoft

12.88%

7.1%

Alphabet

6.94%

3.87%

Amazon

6.33%

3.42%

Nvidia

4.9%

2.85%

Meta Platforms

3.43%

1.89%

Tesla

2.78%

1.57%

Total

50.26%

27.79%

Data Source: Vanguard.

Interestingly enough, the Vanguard Growth ETF is more than doubling the percentage return of the S&P 500.

AAPL Chart

AAPL data by YCharts

A focus on growth instead of value and income

If you're interested in the Magnificent Seven, chances are you are interested in growth and dominant industry-leading companies, and are willing to pay a premium price for a stock relative to the market. The Vanguard Growth ETF checks all of those boxes and then some. For starters, it is one of the largest ETFs out there, with a massive $170.7 billion in net assets.

The 214 stocks in the index outside of the Magnificent Seven include a lot of companies that wouldn't be considered traditional growth stocks.

For example, Visa (V 1.32%) and Mastercard (MA 1.18%) are the ninth- and tenth-largest holdings in the fund. But they are the only companies of meaningful weight from the financial sector in the ETF. This is a stark contrast to the two largest financials in the S&P 500, which are Berkshire Hathaway (BRK.A -0.22%) (BRK.B -0.30%) and JPMorgan Chase (JPM -0.39%).

All four companies are industry leaders and massive behemoths in terms of their size. But Visa and Mastercard are on the growth side of the financial spectrum, more so than Berkshire's property and casualty insurance business or a diversified bank like JPMorgan. They are also more expensive stocks, each supporting above a 30 price to earnings (P/E) ratio, compared to just 10.4 for Berkshire and 9.1 for JPMorgan.

75% of the fund is concentrated in the technology, communications, and consumer discretionary sectors -- all of which tend to trade at premium valuations to the market. So it's no wonder the Vanguard Growth ETF has a 32.2 P/E ratio, a premium valuation relative to the 21.2 P/E ratio of the Vanguard S&P 500 ETF.

The concentration on growth instead of value unsurprisingly results in a lower dividend yield, just 0.6% for the Vanguard Growth ETF compared to 1.6% for the Vanguard S&P 500 ETF.

The theme of the ETF is to invest in companies that are going to devote their cash flows to growing their businesses and improving operations, not paying dividends. The inherent risk with this approach, and the allocation of the ETF, makes it more volatile than the S&P 500 and more sensitive to the economic cycle. This is fine if you're an investor with a long-term time horizon, but it's not attractive if you're looking for companies that are good values and pay dividends.

Checks and balances

The Vanguard Growth ETF is a balanced and low-cost way for someone to buy the Magnificent Seven. Instead of investing $1,000 in the Magnificent Seven, $1,000 invested in the Vanguard Growth ETF is basically putting half of that in the Magnificent Seven and then the other half in a boatload of other top companies. And to top it all off, a $1,000 investment in the Vanguard Growth ETF would incur a mere 40 cent annual expense thanks to the fund's minuscule 0.04% expense ratio.

One of the biggest mistakes investors make is accidentally overly allocating into a single stock or type of stock. The Vanguard Growth ETF is a way of making sure that doesn't happen, while also being an incredibly bullish bet on the growth of the stock market. After all, this is an ETF that is up just shy of 40% YTD. So it has the potential to produce some serious returns. But it also ensures that an investment remains diversified.

The best way to invest in the Magnificent Seven

The Vanguard Growth ETF has had an incredible year. For the ETF to keep outperforming the major indexes, the Magnificent Seven are going to have to continue beating the market.

No one knows if that will happen in the short term. But over the long term, the Magnificent Seven open the door to a lot of exciting trends and paradigm-shifting technologies. The Vanguard Growth ETF provides a responsible and measured way to invest in the Magnificent Seven without compromising upside potential.