Why the Vanguard S&P 500 Growth ETF is a Smart Pick for Your Roth IRA

A Roth IRA provides unique benefits for those looking to grow their investments. With tax-free withdrawals in retirement, using a Roth to hold aggressive growth investments can enhance long-term capital gains. This is why I’ve chosen to focus my retirement strategy around the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG).

Let’s explore why this fund could be a great choice for your Roth IRA and how it stacks up against Warren Buffett’s favored S&P 500 index fund.

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Strong Returns Driven by Technology

The Vanguard S&P 500 Growth ETF has shown impressive performance, with a gain of 34.54% from January 1 to November 26, 2024, surpassing the overall S&P 500’s return of 27.66%. This success comes from investing in 234 growth-oriented firms within the S&P 500, selected based on earnings growth and momentum.

The fund’s focus on technology mirrors the ongoing digital transformation in the economy. Nearly 50% of its portfolio consists of tech stocks, including leaders like Apple, Nvidia, and Microsoft. Their ongoing innovation supports strong growth prospects.

Quality Focus vs. Buffett’s Simplicity

Even with its growth orientation, the fund holds to strict quality standards. Its companies show a 39.7% return on equity and a 25.2% earnings growth rate, justifying its higher price-to-earnings ratio of 35 compared to the broader S&P 500’s 26.9.

Warren Buffett advises putting 90% of retirement savings in a low-cost S&P 500 fund, like the Vanguard S&P 500 ETF (NYSEMKT: VOO). This strategy ensures wide market exposure and offers a very low 0.03% expense ratio.

Although the Vanguard S&P 500 ETF covers 504 stocks and balances growth with value, it has consistently produced lower returns during strong market periods than its growth-focused counterpart. This strategy, however, leads to less volatility and broader sector diversity.

Catching Costs Before They Catch Up

Investment fees directly affect your returns. The Vanguard S&P 500 Growth ETF has an annual expense ratio of 0.10%, meaning for a $10,000 investment, fees total $10 annually. On the other hand, the Vanguard S&P 500 ETF charges just 0.03%, amounting to $3 per year.

This $7 difference may seem minor, but it accumulates over time with investment growth. Should the higher returns of the growth fund continue, they could well exceed the extra fee. Both options rank among the most cost-effective in their categories, with typical industry fees being almost ten times higher.

Understanding Risk and Reward

However, the Vanguard S&P 500 Growth ETF does carry more risk due to its focus. Its beta of 1.11 means that it reacts strongly to market changes: for instance, if the market rises 10%, this fund usually increases by about 11.1%. Conversely, it can decrease more drastically during downturns. For those investing in a Roth IRA long-term, this volatility might be a reasonable trade-off for increased growth potential.

There is significant overlap in holdings between both funds, suggesting they will often perform similarly. Nonetheless, the growth fund prioritizes companies showing greater growth capabilities. Since its inception, the Vanguard S&P 500 Growth ETF has clearly outperformed the Vanguard S&P 500 ETF:

VOO total return level, data by YCharts.

Looking Ahead

The tax benefits of a Roth IRA make it ideal for aggressive growth strategies. Tax-free withdrawals in retirement can lead to significantly higher after-tax wealth when emphasizing growth-oriented investments.

For those with a long investment timeline and a higher risk tolerance, the Vanguard S&P 500 Growth ETF could be an excellent option for maximizing tax-free growth in a Roth IRA. While it may experience larger drops during market corrections, its strategic emphasis on quality growth investments supports strong long-term wealth generation.

A Valuable Chance Awaits

Have you ever felt like you missed your opportunity to invest in top-performing stocks? If so, it’s worth paying attention now.

Occasionally, our expert analysts suggest a special “Double Down” recommendation for companies poised for significant growth. If you’re worried about missing out, this could be your moment to act before it’s gone. The potential returns are notable:

• Nvidia: A $1,000 investment in 2009 would now be worth $355,011!*
• Apple: A $1,000 investment in 2008 would have grown to $44,516!*
• Netflix: A $1,000 investment in 2004 would now be $470,586!*

Currently, we are issuing “Double Down” alerts for three exceptional companies, and opportunities like this may not arise again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 25, 2024

George Budwell has positions in Apple, Microsoft, Nvidia, Vanguard Admiral Funds – Vanguard S&P 500 Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.