There's a reason that diversification has stood the test of time as one of the most important aspects of investing. Not only does it lessen the impact of poor performance from a single or few companies, but it also offers the chance for more consistent portfolio performance. And thanks to exchange-traded funds (ETFs), achieving diversification has become as simple as making a few investments.
One fund, the Vanguard Growth ETF (VUG +1.52%), has emerged as a premier investment vehicle of its kind on the U.S. stock market. If you have an emergency fund saved (at least three to six months' worth of expenses), high-interest debt paid down (such as credit cards), and $1,000 available to invest, consider putting it into this ETF.
NYSEMKT: VUG
Key Data Points
A glimpse into what can be the best of both worlds
The appropriately named Vanguard Growth ETF is a fund focusing on large-cap companies with high-growth potential.
On one hand, being growth-focused means the ETF presents investors with a chance for market-beating upside potential. On the other hand, consisting of only large-cap stocks (the smallest company in the ETF has a market cap of over $7 billion) gives the ETF a bit more stability than is often experienced with smaller growth stocks.
The size of the companies in the ETF does not exempt it from the volatility that smaller growth stocks experience, but the diversification across larger companies does help reduce some of the risks associated with smaller growth stocks. It's a good trade-off between risk and reward.
World-class tech companies leading the way
The Vanguard Growth ETF is market cap-weighted, so larger companies account for more of the fund. This has led to a sizable portion of the fund consisting of trillion-dollar tech stocks. Below are the companies in the ETF with market caps over $1 trillion:
| Company | Market Cap | Percentage of the ETF |
|---|---|---|
| Microsoft | $3.19 trillion | 12.53% |
| Apple | $2.93 trillion | 10.81% |
| Nvidia | $2.75 trillion | 8.86% |
| Alphabet | $2.19 trillion | 7.57% |
| Amazon | $1.89 trillion | 7.06% |
| Meta Platforms | $1.21 trillion | 4.11% |
Data source: Vanguard. Market caps as of May 28, 2024 and rounded to the nearest $10 billion. ETF percentages as of April 30, 2024.
With six companies accounting for over half of the ETF, the Vanguard Growth ETF isn't the poster child for diversification. But it does provide great exposure to some of the world's most dominant, innovative, and sustainable companies.
The tech sector makes up around 56% of the Vanguard Growth ETF, so it shouldn't be the foundation of your stock portfolio. However, it can be one foundation piece that you complement with other stocks and ETFs which cover sectors lacking in this ETF. Here's how other sectors are represented in the fund:
- Basic materials: 1.4%
- Consumer discretionary: 19.1%
- Consumer staples: 0.7%
- Energy: 1.3%
- Financials: 2.4%
- Health care: 7.6%
- Industrials: 8.7%
- Real estate: 1.4%
- Telecommunications: 0.8%
- Utilities: 0.2%
Historical returns show the ETF's market-beating potential
Since its January 2004 inception, the Vanguard Growth ETF has averaged around 10% annual returns. Over the last decade, that average has jumped to close to 14% because of the explosion of top tech stocks dominating the fund.
You should never use past performance to predict future performance, but for the sake of illustration, let's assume these trends continue. Averaging 10% annual returns, it would take an investment 7.2 years to double in value, according to the Rule of 72. At 14% average annual returns, it would only take around 5.1 years.
Nobody can predict how the stock market will fare going forward, but considering the companies leading the charge for the Vanguard Growth ETF, investors can feel confident that they're invested in a fund that has all the components needed to, at minimum, grow at market pace. Especially if history is any indication.
VUG Total Return Level data by YCharts
Keep more of your returns to yourself
One aspect of the Vanguard Growth ETF that shouldn't be overlooked is its low cost. With an expense ratio of 0.04%, the fund would only cost investors $0.40 per $1,000 invested. The differences between expense ratios often seem small on paper, but they can easily add up to considerable amounts over the long haul.
It's one thing to have impressive returns, but it's equally as important to ensure you can keep as much of those returns for yourself as possible. A low-cost ETF like the Vanguard Growth ETF ensures you can do the latter.
