2023 was a great year for stocks, with the S&P 500 (^GSPC 1.02%) jumping 24% and the Nasdaq Composite soaring 43%.
However, one exchange-traded fund, or ETF, outperformed them both. That was the Vanguard Growth ETF (VUG 1.82%), which finished the year up 46%. Growth stocks were big winners last year, driven by low valuations at the start of 2023 after 2022's bear market and excitement about new artificial intelligence (AI) technologies following the launch of OpenAI's ChatGPT in late 2022.
The Vanguard Growth Fund is a popular ETF, but less well-known than those that track the S&P 500 and other major indexes. Let's take a closer look at the ETF, discuss what investors should know about it, and whether it's likely to beat the broad market again this year.
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What is the Vanguard Growth ETF?
The Vanguard Growth ETF is a large-cap growth fund that tracks the CRSP US Large Cap Growth Index.
The fund holds 207 stocks and, like the Invesco QQQ ETF and other funds that track the Nasdaq-100, it's highly concentrated among the largest S&P 500 stocks. For example, more than 25% of the fund is made up of just Apple and Microsoft, and the "Magnificent Seven," which also includes Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla, makes up about half of the fund.
Unlike the Nasdaq-100 ETFs, the Vanguard Growth Fund also includes stocks listed on the New York Stock Exchange such as Eli Lilly, Visa, and McDonald's.
The Vanguard Growth Fund has a low expense ratio of 0.04%, meaning it costs almost nothing in fees to hold it, and it offers a modest dividend yield of 0.6%. The fund has total net assets of $200 billion, making it one of the larger ETFs available.
What to expect for the Vanguard Growth Fund in 2024
The VUG enters 2024 trading at a high valuation, with its price-to-earnings ratio at 38. That's a reflection of the lofty multiples that many of its top holdings, including Amazon, Nvidia, and Tesla, trade at, as nearly every stock in the Magnificent Seven trades at a premium to the S&P 500.
However, for many of those stocks, those premium valuations seem justified. Nvidia, for example, posted revenue growth of better than 200% in its most recent quarterly report, and its earnings per share jumped by more than 12 times. That surge won't last forever, but it's one piece of evidence that shows that 2024 earnings are likely to be significantly higher than 2023 earnings for at least some of the biggest holdings in the VUG. Amazon similarly reported net income up more than 200% in its third-quarter report, as the company has cut costs, focused on efficiencies, and grown into warehouse capacity. And Meta's third-quarter profit more than doubled as well.
Following Taiwan Semiconductor Manufacturing's recent earnings report, there are also signs of a recovery in the semiconductor sector, which could lift profits at member stocks like Advanced Micro Devices and Texas Instruments.
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Can the VUG beat the S&P 500 in 2024?
The new year is young, but the Vanguard Growth Fund already has a slight edge over both the S&P 500 and Nasdaq Composite this year. Through Jan. 19, the VUG is up 2.7%, compared to a 1.6% gain for the Nasdaq and 1.2% at the S&P 500.
In addition to the tailwinds of the AI boom and the broader momentum in the stock market after last year's jump, growth stocks should also benefit from falling interest rates -- the Federal Reserve has forecast three rate cuts this year, or 75 basis points of total cuts.
Lower interest rates tend to favor growth stocks, because they lower the discount rate in discounted cash flow models, making future earnings more valuable. Rising interest rates in 2022 were a big reason why growth stocks and tech stocks crashed and underperformed the broad market.
The expected interest rate cuts alone might not be enough to push this particular Vanguard fund to another win, but those, along with the strength in the Magnificent Seven, the ongoing AI boom, and expectations of a recovery in the economy, make the Vanguard Growth ETF well-positioned in 2024.
It's a good bet to outperform the S&P 500 again this year.
