Vanguard Growth ETF Explained

Apr 15, 2022 02:08 PM ET
Vanguard Growth ETF Explained

Stocks that generally tend to rise at a faster rate than the market as a whole are known as "growth stocks." Growth stocks are more tax-efficient since they reinvest revenues into their own future projects, research, and development rather than paying out dividends.

An easy and inexpensive way for investors to get a taste of fast-growing companies is through growth exchange-traded funds (ETFs). As the name suggests, a large-cap growth ETF holds stock in hundreds of publicly traded companies that are experiencing significant rates of revenue and profit growth.

During the recent few years, growth stocks have surpassed value investments. Nonetheless, it's possible that when interest rates rise, the market will shift from growth to value investments. Because of this, it is impossible to predict future outcomes based on past performance.

An overview of Vanguard Growth ETF (VUG)

The Vanguard Growth ETF (VUG) was established in 2004 and has grown to be among the most popular growth funds in the world, with assets totaling over $162 billion. For this product, the CRSP US Large Cap Growth Index serves as a benchmark for selecting large-cap growth equities. It's fair to say that this is the S&P 500's growth half.

The Vanguard Growth ETF fund uses an indexing investment method to replicate the performance of the CRSP US Large Cap Growth Index, which is a broadly diversified index mostly made up of growth stocks of large US corporations.  

The investment strategy

CRSP US Major Cap Growth Index, an unmanaged benchmark reflecting growth stocks of large US companies, is the primary benchmark for Vanguard Growth ETF's performance. Each stock is held at about equal weighting in the fund's portfolio, which aims to mimic the index's overall composition.

There are several criteria used to assess whether a stock is a large-cap growth: market capitalization, long and short-term growth in profits per share (EPS), sales per share (sales/capitalization), and current investment-to-assets ratio, return on assets among others.

To keep things simple and affordable, VUG uses a portfolio of around 265 predominantly large-cap equities with growth potential and charges an annual fee of about 0.04%. In order to minimize risk, it is vital to investigate a fund's portfolio before making an investment thoroughly. The technology sector accounts for 44.90 percent of the VUG ETF's holdings.

Even though VUG is weighted by market capitalization, the majority of its assets are invested in technology stocks, with Apple (AAPL), NVIDIA, TESLA (TSLA), Microsoft, and other top ten stocks accounting for around 51% of total assets. In addition, cyclical stocks account for 28.7 percent of the fund's holdings.

Performance and risks

Before fees and expenditures, VUG aims to replicate the performance of the CRSP US Large Cap Growth Index. The CRSP US Large Cap Growth Index is a subset of the CRSP US Large Cap Index that tracks the performance of growth-oriented corporations in the United States.

Large-cap companies typically have a market value of more than $10 billion. Besides being not as risky as mid and small-cap companies, they tend to be a more reliable investment option because of their lower risk and predictable cash flow.

Growth stocks have above-average revenue and earnings growth rate. In addition to growing faster than the overall market, their valuations are substantially higher. Furthermore, growth stocks have a greater risk than other types of equity.

However, despite the fact that in bull markets, growth stocks are more likely to beat their value counterparts, value stocks have historically outperformed growth equities.

All other factors equal, low-cost ETFs can outperform more expensive ones, and this is especially true when all other fundamentals are the same. A $10,000 investment in VUG yields $4 in annual expenses or 0.04%. This is significantly lower than the 0.24% average expense ratio for the industry as a whole.

VUG ETF weekly chart over the past 5 years

VUG has a beta of 1.03 and a standard deviation of 24.61% over the past three years, making it a medium-risk investment option in the sector. When looking at ten years of returns, the ETF returned 16%, while five years of returns were 19.8%.

Internal regulation 

The fund may not do any of the following in relation to 75% of its total assets:

  • Buy more than 10% of a single company's outstanding voting securities

  • The fund may not, except to mimic the index's composition, purchase securities from any issuer if doing so would result in the fund investing more than 5% of its total assets in securities of that issuer. Obligations of the United States government or any of its agencies or instrumentalities are exempt from this restriction.

In summary

Passively managed Vanguard Growth ETF (VUG) was created to give investors with broad exposure to the US stock market's Large Cap Growth sector. It is a growth stock, which means it has a higher than normal revenue and earnings growth. In addition to growing faster than the overall market, these are also more expensive.

Growth stocks tend to be more volatile than their value-oriented counterparts. One of the main distinctions for VUG is the lower expense ratio, which is 0.04% compared to 0.24% for the industry average. Importantly, this ETF has shown a long-term track record of good returns. Therefore it is definitely worth giving a try.


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