VUG vs MGK: Which ETF Is Best?

Outside of the technology sector, persistent inflation and high interest rates have continued to wreak havoc on many businesses’ sales. All of the current uncertainty about the market’s direction serves to underscore one of the key tenets of investing, diversification.

A good number of ETFs are designed to track the stock composition of a major index. VOO, for instance, is a popular Vanguard S&P 500 ETF, and its portfolio holds a piece of each of the 500 stocks in that benchmark index. Other ETFs track international stocks, small-cap stocks, as well as alternative investments that span the gamut from oil to bonds.

Vanguard’s Mega-Cap Growth ETF (NYSEARCA: MGK) has a narrower focus than VOO, with the bulk of its portfolio invested in technology stocks like the “Magnificent Seven”.

Another Vanguard offering is the Vanguard Growth ETF (NYSEARCA: VUG), which shares a similar focus with MGK but includes more stocks. Due to the success of tech stocks over the past year, both ETF’s have outperformed VOO by over 10%.

But which ETF is best: VUG or MGK?

Is MGK A Good ETF?

MGK has been around since 2007, and the fund currently tracks the stocks contained in the Center for Research in Security Prices (CRSP) US Mega Cap Index. Mega caps are generally considered to be companies with valuations of over $200 billion. The index contains 82 of the biggest US stocks across a variety of industries.

MGK, like most ETFs, is passively managed. So the contents of the ETF change as CRSP moves companies in and out of its index. But each of the 82 stocks aren’t given equal weight. More weight is allocated to the companies that have the highest market capitalization.

Microsoft, for instance, makes up 14.6% of the ETF, with Apple close behind. Tech stocks account for 58.75% of the ETF’s portfolio. That’s far above the next industry, consumer discretionary, with 21.17% of the ETF.

Because MGK is growth-focused, it’s no surprise that tech stocks have such a heavy weighting. The high concentration on one industry rightfully is a concern for many investors who are looking for a more broadly diversified basket.

A downside of the concentration is that MGK would not have been an effective hedge against the struggles that tech stocks faced in 2022. But the recent enthusiasm for artificial intelligence has erased the setbacks of 2022, and MGK has outperformed the S&P 500 over the past five years, with a 136% vs 87.7%, respectively.

Is VUG A High-Quality ETF?

VUG addresses those diversification concerns somewhat because it zooms out to include companies that aren’t quite mega caps. The fund includes 208 stocks but there is still a predominant tech focus. Around 55.8% of the fund is in technology stocks.

It’s also similarly weighted to MGK, so Microsoft and Apple account for around 24% of the portfolio. The ETF tracks the CRSP Large Cap Growth Index, where the smallest company in the index has a market capitalization of $964 million.

VUG has risen by 124.7% over the past five years compared to the S&P 500’s 87.7% return over the same period. So while VUG might have a wider scope, it hasn’t outperformed MGK over a 5-year span. That is because the most dramatic gains over that period have been concentrated in a handful of big-tech stocks.

Which ETF Offers Better Value, MGK or VUG?

Past performance, however, is not always an indicator of future gains. Year-to-date, MGK and VUG have been in a dead heat with roughly 13.8% increases. Even though VUG includes more stocks, the weighting has kept the performance of the fund on par with MGK.

MGK has a slightly higher rolling one-month volatility value of 5.05%, which is to be expected given it has fewer stocks. VUG’s volatility is 4.96%. Both ETFs place behind VOO, with a volatility value of 3.33%. That also makes sense given that VOO encompasses many more stocks.

Another feature of ETFs is that they pass on dividends to their holders. VUG’s 12-month dividend yield is 0.65%, beating MGK’s 0.55% annual dividend yield. The dividend payout fluctuates each quarter, but the last payout for VUG was $0.47 per share. MGK’s most recent quarterly dividend was $0.43 per share.

What Are The Expense Ratios For VUG & MGK?

Though there are plenty of benefits to investing in ETFs, they do charge fees. Maybe not as much as actively managed mutual funds, but it’s still important to understand the expense ratio associated with each ETF.

VUG has an expense ratio of 0.04%, which means that a $10,000 investment in the ETF that’s held for one year would cost an investor just $4. These fees aren’t charged directly to VUG holders, they are taken out of the investment’s value over time.

MGK has a slightly higher 0.07% expense ratio. Vanguard claims that the average expense ratio for rival ETFs similar to VUG and MGK is 0.96%. By contrast, VOO has an expense ratio of 0.03%.

What Is The Best ETF, VUG or MGK?

VUG and MGK are similar US large-cap growth ETF options from Vanguard. MGK has a laser focus on mega cap stocks, while VUG takes a broader approach to the same sector. Both funds have outperformed the S&P 500 over the past year.

That success is likely to carry forward if the broader market rallies, so both ETFs are great options for investors who are looking for exposure to technology stocks that have been on a tear over the past year. VUG has a better expense ratio, a slightly higher dividend yield, and less volatility than MGK.

But MGK has outperformed VUG over the past 5 years. Investors who believe future growth will be driven by the Magnificent Seven might find MGK more appealing.

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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.