Market Joy: Understanding the Vanguard Mega Cap Growth ETF’s Remarkable Performance

The stock market is buzzing with positivity, as major indexes continue to reach new highs. However, this wasn’t the case two years ago when many growth stocks struggled. The stark contrast between the harsh sell-offs of 2022 and the remarkable rally since then is evident in the two-year performance charts.

Since the beginning of 2023, the S&P 500 has risen by 58.5%. In comparison, the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) has surged by an impressive 103.7%. This means your investment would have more than doubled in less than two years.

Let’s explore the reasons behind this ETF’s outstanding performance and how you can make the most of it.

Image source: Getty Images.

Relying on Market Leaders

The top 10 stocks held in the ETF have gained so much value that they now account for 65.5% of its total assets. The ETF is designed to follow momentum, which means that as outperforming stocks rise in value, their share in the ETF grows. This mechanism is similar to how the S&P 500 operates. For context, twenty years ago, ExxonMobil was the largest U.S. company by market capitalization, but today, it represents only about 1.1% of the S&P 500.

Investing heavily in megacap growth stocks has proven to be a reliable method of outperforming the S&P 500 in recent years. Several major tech companies have seen their stock prices more than double during this time. In particular, stocks like Nvidia, Meta Platforms, Tesla, and Amazon have experienced even more significant gains.

NVDA data by YCharts

This Vanguard Mega Cap Growth ETF offers a direct approach to backing today’s leading companies and anticipating their continued success. The following table illustrates that the ETF holds considerably larger percentages of specific stocks compared to the Vanguard S&P 500 ETF.

Data source: Vanguard.

The S&P 500 has witnessed more concentration among megacap tech companies, but it still trails behind the Mega Cap Growth ETF. This ETF serves as a useful opportunity for investors willing to take on more risk since it offers a clear understanding of its makeup early on. If these companies maintain their leadership in the market, it is likely that this ETF will continue to outperform the S&P 500. However, during challenging market conditions, as experienced in 2022 when it dropped 34%, the ETF could face significant declines.

Evaluating Your Investment Strategy

With a low expense ratio of just 0.07%—equating to $7 for every $10,000 invested—the Mega Cap Growth ETF represents an excellent option for targeting growth sectors. Nevertheless, several considerations should be kept in mind before investing. One key factor is duplication.

For instance, if Nvidia comprises 12.5% of your portfolio, purchasing the Mega Cap Growth ETF would not diversify your holdings, as that stock is already included. Hence, it would simply keep the same allocation.

For those holding significant positions in established mega-cap stocks who still seek growth, exploring alternatives like the Vanguard Growth ETF provides a less concentrated option. Investors might also consider the Vanguard Mid-Cap ETF or the Vanguard Small-Cap ETF, both of which do not include these mega-cap stocks, offering a path to greater diversification.

The second consideration is valuation. Many mega-cap stocks have seen their prices increase faster than their earnings growth, resulting in higher valuation multiples. The market’s expectations for strong earnings next year will put pressure on these companies to deliver results. If they succeed, there could still be declines, as witnessed with Nvidia after its recent earnings report.

Some investors may prefer to focus on their most trusted growth stocks instead of exclusively investing in the Mega Cap Growth ETF. For example, stocks like Alphabet and Meta Platforms offer price-to-earnings ratios lower than the average of the S&P 500, making them a more attractive choice for value investors. Alternatively, if a specific mega-cap stock, like Microsoft, holds strong appeal, targeting that stock directly might be a prudent approach.

Strategizing in Favor of Market Leaders

Investing in industry-leading companies during volatile times can significantly grow wealth over the long term. Although it may feel uncomfortable to buy stocks at their peaks, seasoned investors can find comfort in knowing that these leading companies are likely to produce strong earnings growth. This growth is crucial for justifying higher valuations, and so far, it has largely driven the recent market rally.

However, it is essential to recognize that the substantial gains made in the last couple of years are not typical. Investors should always approach investments with a solid long-term mindset rather than seeking short-term gains.

Seizing an Opportunity Amid Market Success

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