The lion's share of the market's returns over the last century has come from a small handful of equities, and most of them have been large-cap stocks. This might seem surprising, but the numbers don't lie.
The current tech giants -- Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla --are just the latest examples of this long-term pattern. These so-called "Magnificent Seven" stocks have all handily outperformed the S&P 500 since 2013 in terms of total return on capital (assuming dividends were reinvested and before taxes).
However, picking individual stocks in this space comes with unique risks. Several macro factors outside of a company's control can affect its performance from year to year, such as regulatory changes, competitive threats, technological disruptions, and shifting consumer preferences.
That's why many investors prefer to invest in diversified exchange-traded funds (ETFs) that track the large-cap growth segment of the market. These funds offer exposure to a basket of stocks that share similar characteristics, such as high earnings-growth potential, strong competitive advantages, and leading market positions.
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Two of the most popular and best-performing ETFs in this category are the Schwab U.S. Large-Cap Growth (SCHG 1.95%) and the Vanguard Growth Index Fund (VUG 1.82%). Both of these passively managed funds aim to replicate the performance of a large-cap growth index and sport near-industry low expense ratios. They also have high liquidity and broad diversification across the large-cap space.
Which of these popular funds is the better buy right now? Here's a closer look at each fund to see how they compare.
Schwab U.S. Large-Cap Growth
The Schwab U.S. Large-Cap Growth ETF, or SCHG for short, was launched in 2009. It has since grown into one of the largest and most popular ETFs in its category.
The fund tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. The SCHG has an expense ratio of 0.04%, which is among the lowest in its category and significantly lower than the category average of 0.96%. The fund pays an annualized yield of 0.43%.
The SCHG is broadly diversified across the large-cap growth space but heavily weighted toward the technology sector. In the most recent quarter, 44% of its holdings were composed of tech companies.
Eli Lilly (LLY 1.19%) and UnitedHealth were the only two non-tech companies in the fund's list of 10 largest holdings at the end of the third quarter of 2023. After technology, the SCHG's three largest sector holdings in rank order are healthcare, communication services, and consumer discretionary.
The SCHG has handily outperformed both the S&P 500 index and the Vanguard Growth Fund over the past 10 years (see graph below). It has also modestly outperformed these benchmarks over the prior one-year and five-year periods.
SCHG Total Return Level data by YCharts.
Vanguard Growth Index Fund
The Vanguard Growth Index Fund (aka VUG) tracks the performance of the CRSP US Large Cap Growth Index. This Vanguard ETF sports an ultra-low expense ratio of 0.04%, an annualized yield of 0.56%, and a high diversification factor with holdings of 221 large-cap growth companies.
The VUG was launched in 2004. Since then, the fund has delivered total returns on capital of 632.7%. The fund is heavily weighted toward the technology (53.1%) and consumer discretionary (21%) sectors. The only company to make its list of top 10 holdings outside of these two sectors is Eli Lilly.
Verdict
It's super hard to beat Vanguard funds in a head-to-head comparison. But the SCHG is arguably a modestly better buy than the VUG.
The key reason is the SCHG's lower exposure to the highly cyclic consumer discretionary sector. In some years, the VUG's modest tilt toward consumer discretionary companies ought to pay off with a higher return, compared to the SCHG. But with the economy on unstable ground at the moment, the SCHG's non-cyclic holdings in healthcare and communication services should give it the edge.
