The Vanguard Mega Cap Growth ETF (MGK 0.13%) does exactly what its name implies: It buys the largest growth companies. That's been a winning investment plan for a number of years, but investors need to consider the portfolio of this exchange-traded fund (ETF) a bit more deeply before making a new commitment today.
Here's why the Vanguard Mega Cap Growth ETF could be a problem for your portfolio if you don't understand what it is you are buying.
What does the Vanguard Mega Cap Growth ETF do?
The Vanguard Mega Cap ETF tracks the CRSP US Mega Cap Growth Index. Some complex math goes into the index, but the outcomes are pretty simple to understand.
It uses market caps to determine what stocks count as megacaps. It factors in earnings growth, return on assets, and the investment-to-assets ratio to assign companies to the growth category. The companies that are found in both groups get into the ETF.
Image source: Getty Images.
This isn't a good or bad approach, per se. What it does is put investors into the stocks that are likely to be the most popular during market upturns. That can feel pretty good in a bull market. However, there's a problem to consider because buying the largest, most popular companies is also likely to lead investors to be overweight in a small number of stocks.
For example, just three stocks make up more than a third of this Vanguard ETF's portfolio today. All three fall into the technology sector. They are names you likely know: Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA). But that's not the end of the story, because technology as a sector makes up a huge 60% of the ETF's assets right now.
When the market turns lower, the largest and most popular stocks and sectors are likely to lead the way down. Which means that bear markets and corrections are likely to be particularly painful if you own the Vanguard Mega Cap Growth ETF.
What has happened in 2025?
Which is why it is interesting to consider 2025 as a stress test. Comparing the Vanguard Mega Cap Growth ETF to the broader S&P 500 index (^GSPC -0.13%) and an equal-weighted version of the S&P 500 index, the Invesco S&P 500 Equal Weight ETF (RSP -0.53%), is illuminating.
MGK Total Return Level data by YCharts.
Notice that the Vanguard ETF fell furthest during this turbulent period. The more diversified S&P 500 index, which itself leans toward large caps and is market-cap weighted, fell in the middle, performance wise. And the Invesco S&P 500 Equal Weight ETF, which gives each stock in the S&P 500 index the same weighting (meaning that each company has the same opportunity to affect performance), was the best performer.
In this period, giving the largest, and likely recently best-performing, companies an overweight status turned into a liability. To be fair, if you look over a longer period of time, the Vanguard ETF is the clear winner. And it rebalances quarterly, so it is fairly quick to change when the market leaders shift.
But investors shouldn't go in without understanding the risk that focusing on the biggest and the best can lead to worse drawdowns when the market shifts from a bull to a bear.
MGK Total Return Level data by YCharts.
There are two big takeaways here
There's nothing wrong with buying the Vanguard Mega Cap Growth ETF as long as you understand what it is you own. History suggests that you will do particularly well in good markets. Most investors will see that as a win.
That said, you need to go in knowing that downturns could be particularly difficult times for this ETF. And you'll either need to grit your teeth and hold for the long term or, perhaps better, pair the Vanguard Mega Cap ETF with another investment that will perform better during downturns. That way, you have something else to look at besides the red ink the Vanguard Mega Cap Growth ETF is putting up.
