As October doldrums ended and November exuberance began, a shifting in the tides was evident when a host of growth stocks in Cathie Wood’s exchange-traded funds soared.
A veritable who’s who of high-potential companies burst higher and signaled that, perhaps, a bullish trend was in the offing.
@CathieDWood had a great week:
— Financhill (@financhill) November 6, 2023
Since then, growth has come back with a bang and led the major market averages, such as the S&P 500, which is up 7.5% in just two weeks.
It is starting to look like the much-anticipated Santa Claus rally is going to power higher this year and leave bears scratching their heads wondering how they missed the surge in prices. If so, there are few better places to ride the wave than growth stocks, but which ones are best?
As the market has pointed out so clearly over the past few years, particularly with Cathie Wood’s ARK Invest ETF, growth stocks are a double-edged sword. From the lofty highs of 2021 to the crushing lows of 2022, it’s a perilous game to buy companies with revenues accelerating and losses following in tandem.
Cathie’s flagship ETF also comes with a high expense ratio of 0.75%, which is pretty significant as exchange-traded funds go, even though it is actively managed. But is there an alternative that offers exposure to growth stocks without the high expense ratio?
How To Get Low-Cost Exposure To Growth
The Vanguard Growth Index Fund (NYSEARCA:VUG) beats rivals on costs by a huge margin, charging an expense ratio of just 0.04% versus a peer average of 0.96%. To give you an example of what that costs, if you invested $10,000 into VUG, you would pay just $4 a year to hold a collection of 221 stocks.
The top 10 equity holdings in VUG are a who’s who of technology sector titans, including Microsoft, Alphabet, Amazon, Apple, Nvidia, and Tesla, as well as top tier names from other sectors, such as Visa and Eli Lilly.
While it seems fairly technology heavy and it is with 53% exposure, the mix of holdings across sectors is quite broad, including 21% allocation to consumer discretionary, 8.8% to industrials, 8.1% to healthcare, 2.4% to financials, 1.5% to energy and 1.4% to basic materials.
The combination has proven to be a winning formula year-to-date with VUG share price rising by 39.2% versus 17.8% for the S&P 500.
It’s not a surprise that VUG’s track record has shined relative to the major market when you consider that the net earnings growth rate is 23.4% and return on equity is 33.6%. Those are sky high numbers.
As a result of the low-fees, impressive track record, and broad portfolio mix, the fund has attracted huge inflows of capital and has approximately $170 billion of assets under management.
Is It Time To Buy The Vanguard Growth Index Fund?
In a sense, The Vanguard Growth Index Fund can be compared to a fair weather friend. When everything is going well and the market is rising, you can often expect VUG to be in lockstep with you, and indeed outperforming the major market averages.
But when the tide goes out, expect VUG’s impressive track record to vanish and underperform. In 2022, for example, when the S&P 500 fell by approximately 20%, VUG nosedived from $320 per share at the start of the year to $213 per share by year-end, corresponding to a 33% decline.
So, if you want to goose your returns during bull markets, VUG is a solid choice but to protect against downside risk, consider an allocation back to an S&P 500 ETF during bear markets so as not to give back the excess gains, better known as alpha.
A solid S&P 500 ETF to buy is SPY but it’s not our favorite because the fees are 0.0945%, meaning you’ll pay $9.45 for every $10,000 invested. Obviously it’s a very reasonable fee but you can do even better buying Vanguard’s competitor, VOO, which will charge just 0.03%.
At a quick glance, you might wonder what’s an extra 0.06% or $6 per $10,000? It’s easily dismissed as the cost of a cup of coffee or two but for those investing $100,000 or $1,000,000 or more, that starts to add up to $60 or $600 over the course of the year.
So, back to the question, is now a good time to buy VUG? With the market in full rally mode now, the Vanguard Growth Index Fund has the potential to outperform the major averages.
We cannot over-emphasize however that, should the markets rally into January as part of a blow-off top, VUG could be in jeopardy of underperforming the market as a whole when a correction ensues.
The Vanguard Growth Index Fund is well-diversified across many sectors, won’t set you back much at all in term of fees, and has earned a reputation as a top growth ETF with around $170 billion in assets under management.
The composition of stocks in its portfolio is heavily weighted towards technology companies as you might expect for an ETF tethered to enterprises with high revenue growth, returns on equity and earnings growth.
It’s an excellent choice for investors who want diversification and a little extra alpha during boom times, but be wary of excessive exposure when the economic climate turns gloomy because history would suggest VUG will underperform during bear markets.
With that said, the 5-year track record of VUG is impressive and eclipses that of the S&P 500. VUG has reported gains of 102.1% over the past 5 years whereas the S&P 500 is up comparably less with 65.0% rise.
So, even with the relative underperformance of VUG during the 2022 bear market crash, it still has managed to beat the market, on average, during upswings more than it loses on downswings. That could be in part due to its heavy exposure to top technology firms like Apple, Amazon, Alphabet, and Microsoft, which collectively tend to carry the performance of the top 500 stocks in the US.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.