HomeMarket News Unveiling the Secrets Behind Vanguard's Vanguard Growth ETF Exceptional Performance

Unveiling the Secrets Behind Vanguard’s Vanguard Growth ETF Exceptional Performance

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We are only in the first quarter of 2024, and both the Nasdaq Composite and S&P 500 have seen an impressive year-to-date increase of over 9%. However, Vanguard’s largest growth-focused exchange-traded fund (ETF) has managed to surpass these gains by quite a margin.

Let’s delve into why the Vanguard Growth ETF continues to outshine major indexes, maintaining diversification, and explore the potential of its continuous outperformance – an aspect investors eagerly seek. The burning question remains, is it a worthwhile investment in the current landscape?

Two individuals looking at a phone with surprised reactions.

Image courtesy: Getty Images.

Designed to Let Victors Flourish

The Vanguard Growth ETF zeroes in on the most significant U.S.-based growth stocks, irrespective of their industry or exchange. This contrasts sharply with the S&P 500’s focus on the largest 500 U.S.-based companies by market cap (with a few additional criteria) or the Nasdaq Composite, which encompasses the most substantial companies on the Nasdaq Stock Market, excluding the New York Stock Exchange.

While the Nasdaq usually includes younger, more growth-centric companies, the New York Stock Exchange is home to potent growth stocks like pharmaceutical giant Eli Lilly, tech titans Visa and Mastercard that consistently outperform the broader financial sector.

The inherent structure of the Vanguard Growth ETF positions it to outstrip the Nasdaq Composite and S&P 500 when large-cap growth leads the market – a scenario evident in 2023, 2024, and predominantly over the last five years.

Security

YTD Total Return

1-Year Total Return

3-Year Total Return

5-Year Total Return

Vanguard Growth ETF

11.2%

44.1%

39.9%

131.7%

Source: YCharts. YTD = year to date.

A β€œMagnificent” Concentration

Over half of the Vanguard Growth ETF is tied to the β€œMagnificent Seven” stocks – a term coined by Bank of America analyst Michael Hartnett for seven large, tech-oriented companies. This ETF exhibits a much higher concentration in the Magnificent Seven compared to the SPDR S&P 500 ETF or the Invesco QQQ, mirroring the Nasdaq-100’s performance. The Nasdaq-100 encompasses the top 100 non-financial companies listed on the exchange.

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The higher emphasis on outperforming stocks like Microsoft, Nvidia, and Amazon balances the underperformance of more heavily weighted stocks such as Apple, Alphabet, and Tesla. The Vanguard Growth ETF has the flexibility to incorporate various stocks, hence capitalizing on growth opportunities across the market.

Reaping What You Sow

A significant downside of the Vanguard Growth ETF is its valuation. The price-to-earnings (P/E) ratio sits at a lofty 41.6, contrasting with 36.3 for the Invesco QQQ and 26.2 for the SPDR S&P 500 ETF. The premium valuations stem from a hefty concentration in high-priced stocks, akin to most of the Magnificent Seven. Nevertheless, the P/E based on trailing-12-month earnings only reveals part of the narrative.

Nvidia and Eli Lilly, constituting a substantial 10.4% of the Vanguard Growth ETF, boast very high P/E ratios. Analyst consensus projects their earnings to more than double in the next 12 months – explaining why their forward P/E ratios are less than half the current P/E ratios.

NVDA PE Ratio Chart

NVDA PE Ratio data sourced from YCharts

The valuations of Nvidia and Eli Lilly demonstrate why a growth-focused ETF can appear costly in the short term but may be justified if earnings materialize. Admittedly, there is substantial uncertainty surrounding forward earnings credibility – projections are tentative, susceptible to internal and external factors outside a company’s realm of control.

An Ideal Choice to Meet Your Investment Goals

The Vanguard Growth ETF offers growth-oriented investors a comprehensive blend of diversification and substantial exposure to the market’s prime growth stocks. With a negligible expense ratio of just 0.04%, a $1,000 investment in the fund would net a mere $0.40 in annual fees.

The ETF has recently reached a new all-time high, confirming its upward trajectory in the incandescent world of investing.

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