Technology and artificial intelligence (AI) stocks have been leading the market higher for the past couple of years, but more recently, the market has been pulling back, led by many of the same leaders that drove it higher. This pullback could be a good opportunity to start loading up on the Vanguard Mega Cap Growth ETF (MGK 0.36%), which is heavily weighted toward AI stocks.
What's great about this exchange-traded fund (ETF) is that it's relatively concentrated, owning just 66 stocks. Nearly 70% of its portfolio is in tech stocks, and its portfolio is loaded with top AI stocks. I actually like this ETF as a way to play AI more than the Vanguard Information Technology ETF (VGT +0.44%), because the latter is missing several top AI names that aren't categorized as technology stocks. This includes cloud computing leaders Alphabet and Amazon, which are two of my favorite AI stocks, as well as Meta Platforms, which is currently the cheapest of the "Magnificent Seven" stocks, and Tesla.
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However, these four stocks are all top-10 holdings in the Vanguard Mega Cap Growth ETF. Meanwhile, the ETF's top 10 holdings make up more than two-thirds of its entire portfolio.
The ETF is actually an index ETF, tracking the CRSP US Mega Cap Growth Index. Similar to the S&P 500, it is a market-cap-weighted index, meaning that the larger a company is (share price multiplied by shares outstanding), the bigger its weighting is in the index. The fund consists of only megacap companies, which represent 70% of the total market capitalization of all U.S. stocks in its investable universe. The smallest stock in this group has a market cap of just under $70 billion.
Moreover, the index only includes growth stocks, which are categorized based on categories such as earnings-per-share (EPS) growth projections, historical sales and EPS growth, and return on assets and investment to asset ratios. The index is reconstituted quarterly, but it does try to minimize turnover.
Why now is a good time to start buying the Vanguard Mega Cap Growth ETF
The Mega Cap Growth ETF has been one of Vanguard's best-performing ETFs over the years. Over the past 10 years, it has generated an average annual return of 18.3%, as of the end of September. It has had a yearly return of 19.3% over the past five years and 33.2% over the past three.
NYSEMKT: MGK
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Those are some great returns, and while past performance is not a guarantee of future success, it shows the ETF has a solid long-term track record. Meanwhile, most of its top holdings are in stocks that are leading the charge in AI. While there has been talk of an AI bubble, AI still looks to be very much in its early innings, and all indications are that spending will continue to ramp up over the next several years. Admittedly, some stocks' valuations have risen too high, too fast, such as Palantir Technologies, but many megacap AI stocks are still trading at attractive valuations.
With the Megacap Growth ETF, you are getting most of the top names in AI. These megacap companies have strong growth outlooks and pristine balance sheets and generate robust free cash flow. This is very different from the internet bubble, which was often led by unprofitable companies with questionable long-term business models. With the pullback, you're also able to pick up shares of the ETF more than 5% off its highs.
This is a nice entry point to start adding shares. That said, I would still suggest using a dollar-cost averaging strategy, investing a set amount each month into the ETF. Over the long term, this can help you build wealth and avoid the pitfalls of market timing.
