In general, large-cap stocks usually make an ideal cornerstone for a diversified portfolio. The question is: Should that core be comprised of large companies or really large companies?
That's become a recurring problem for the S&P 500 (^GSPC 0.40%). In the 1990s, the index was pretty balanced. In the lead-up to the dot-com bubble, the tech sector had grown to nearly 30% of the index. Financials were the biggest part of the index up until the real estate crisis took care of that. During the past decade, tech has taken over again, to the point where it now makes up about a third of the index.
Concentration at the top has created a vulnerability that makes investing in only the S&P 500's biggest companies potentially dangerous. If the index has one sector comprising an outsized share of the index, the percentage may be even larger when targeting mega-caps.
That's the problem we have today. The Vanguard S&P 500 (VOO 0.39%) has become a standard part of many portfolios. Using the Vanguard Mega Cap Growth ETF (MGK 0.94%) as an alternative requires special considerations.
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What you get with the S&P 500 vs. Mega Cap Growth ETFs
With the S&P 500 ETF (exchange-traded fund), you get the entire U.S. large-cap market. During the past decade, it's become more of a large-cap growth index, given the dominance of tech stocks and the "Magnificent Seven." Currently, 33% of the index is in technology, with financials (13%), communication services (11%), and consumer discretionary (10%) rounding out the top four sectors.
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The latter two sectors are also considered to have a growth tilt. Ideally, you would like to see the broader market have more meaningful exposure to most areas of the market. That's just not the case today, but the S&P 500 is still considered representative of the U.S. economy.
The tech concentration is even more pronounced in the broader mega-cap growth category. Currently, that ETF consists of a 68% allocation to technology. Consumer discretionary (16%) is the only other sector with a double-digit percentage allocation. Investing in mega-cap growth isn't that far off from just investing in a pure tech ETF.
Your mileage may vary when it comes to how much tech you want in your portfolio, but the allocation within the Vanguard Mega Cap Growth ETF is high for almost any financial goal.
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Which is the better buy?
For long-term investing goals, the Vanguard S&P 500 ETF is almost certainly the better choice. It's a little heavy in tech and growth at the moment, but its diversification relative to the very tech-heavy mega-cap growth category is preferable for longer holding periods.
For short-term investing goals, I still prefer the S&P 500. Tech has had an incredible run during the past decade. But valuations are high, peak AI optimism is already priced into the market, and growth rates are slowly beginning to come back down. The market is already moving away from tech for these reasons.
That makes the Vanguard S&P 500 ETF the better choice.
