Most investors are aware of at least some of the benefits of exchange-traded funds (ETFs). These funds have some big advantages over other financial instruments like mutual funds and individual stocks, including cost efficiencies and diversification. It's hard to beat the ability to buy hundreds of stocks with a single purchase order, after all.
A less-discussed advantage is price. Buying an ETF gives you exposure to stocks you might not be able to purchase outright if your broker doesn't allow you to buy fractional shares in a company. If you have just $500 to invest, for example, you might not be able to purchase a share of Netflix, Costco, or Nvidia stocks. There's a popular Vanguard ETF that owns all these growth businesses, though, and it is available for much less than $500 per share.
What is the Vanguard Growth Fund ETF?
The fund in question is the Vanguard Growth Fund ETF (VUG +0.17%). The first thing to know about it is that the fund is index-based, meaning it doesn't employ expensive mutual fund managers. That approach makes it incredibly cheap compared to those actively managed funds. You'll pay expenses of just 0.06% to own it.
NYSEMKT: VUG
Key Data Points
The next thing to understand about the ETF is that it is heavily focused on tech stocks, especially those that have generated most of the broader market's gains in recent quarters. The top five holdings are straight from the list of "Magnificent Seven" stocks. Here are those biggest positions and the percentage of each holding as a proportion of the total portfolio.
1. Microsoft: 13%
2. Apple: 11%
3. Nvidia: 9%
4. Amazon: 7%
5. Meta Platforms: 5%
Overall, the top five stocks account for 45% of the entire portfolio, meaning this fund is highly concentrated on just a few large growth names.
The fund's performance
The fund has performed incredibly well over the past year, soaring 36% since mid-May of 2023. That's even better than the Nasdaq Composite index has done in that period, and it is far above the 29% gain in the S&P 500.
As those figures illustrate, the Vanguard Growth ETF will tend to perform best during times of elevated investor enthusiasm, particularly in the tech world. Earnings have been soaring at large tech giants and optimism is running high about artificial intelligence (AI) and its potential to boost demand for software and related services. Cloud enterprise businesses like Amazon Web Services and Microsoft Azure are especially well-positioned to capitalize on these factors.
Risks to owning the fund
Yet the profit potential of AI is still an open question. And the fund's rally over the past year has raised the risk that you'll overpay for this ETF. Finally, you might already have exposure to some or all of the biggest components of this fund if you own them as individual stocks or as part of other ETFs.
That's why you'll want to be strategic about investing in the Vanguard Growth Fund. It's a great investment vehicle for those seeking exposure to several expensive stocks like Nvidia and Netflix, especially because it trades below $350 per share today. But you'll want to balance that growth investment with purchases of value and dividend stocks as well.
