Growth is shining bright in 2017. Investors typically prize growth stocks because these securities are expected to deliver above-average earnings expansion, which naturally drives prices through the roof. That sounds good (it is good) but investors have a few other considerations to mull over before — considerations that might make Vanguard ETFs a better play on the space than straight-up stock picking.
“Investors exploring a factor-based investing approach, however, have additional and crucial issues to consider, including their tolerance for active risk, the investment rationale supporting specific factors, and the cyclical variation of factor-based performance,” according to Vanguard research.
When it comes to growth, risk is indeed a consideration. Stocks that are classified as growth names are historically more volatile than those that viewed as quality or value names.
Plus, it is rare that growth stocks pay substantial dividends or feature dividends at all, meaning investors are banking solely on price appreciation when embracing growth stocks or growth ETFs.
In short, stock picking with growth can be tricky. More conservative investors, then, should consider Vanguard ETFs that are geared toward growth, as they offer Vanguard’s traditional low costs while still providing plenty of upside potential.
Vanguard ETFs for Growth: Vanguard Mega Cap Growth ETF (MGK)
Expenses: 0.07%, or $7 annually for every $10,000 invested
The Vanguard Mega Cap Growth ETF (NYSEARCA:MGK) is one of the least expensive growth ETFs in the U.S. — cheaper than 94% of competing funds.
Naturally, most of the competition on price is within the Vanguard family.
MGK tracks the CRSP US Mega Cap Growth Index, which results in a group of 142 holdings with a median market value of almost $97 billion. That means the likes of Apple Inc. (NASDAQ:AAPL), Amazon.com Inc. (NASDAQ:AMZN) and Facebook Inc. (NASDAQ:FB).
Investors that are experienced with growth ETFs probably know at least two things:
- They usually sport higher price-to-earnings ratios than traditional broader market funds
- They typically are heavily allocated to consumer discretionary and technology stocks
MGK obliges on both fronts. The consumer discretionary and technology sectors combine for almost half the ETF’s weight, and its P/E ratio of 26.5 implies a significant premium to the S&P 500.
Vanguard ETFs for Growth: Vanguard Mid-Cap Growth ETF (VOT)
Mid-cap stocks are often thought of as growth assets, so it might be reasonable to expect isolating the growth factor with mid-caps leads to increased volatility.
In the case of the Vanguard Mid-Cap Growth ETF (NYSEARCA:VOT), that is not necessarily the case.
VOT has been barely more volatile than the S&P MidCap 400 Index over the past three years. Perhaps that’s attributable to its median market value, which at $13.6 billion on average across 155 holdings is closer to large-cap in nature. Certainly at the high end of the mid-cap spectrum.
VOT’s sector allocations are a little surprising, with industrial and financial services stocks combining for 43% of the ETF’s weight. But consumer discretionary and tech still come in at a robust 25.5%.
Vanguard ETFs for Growth: Vanguard Growth ETF (VUG)
The Vanguard Growth ETF (NYSEARCA:VUG), while large-cap in nature, is a different beast than the aforementioned MGK. By not focusing on mega-cap stocks, VUG has a much larger roster with 324 holdings, but it’s still smaller on average with a median market cap of $81.7 billion.
The VUG is home to $26.4 billion in assets under management at the end of April, making it the largest growth ETF in the U.S. Moreover, it’s also a basis point cheaper than the previous two entries, making it less expensive than 95% of competing funds — another reason why this Vanguard ETF has attracted a loyal following.
While technology and consumer discretionary stocks combine for more than 47% of VUG’s weight, the ETF’s top 10 holdings include some names that investors do not always associate with growth, including The Coca-Cola Co (NYSE:KO) and Philip Morris International Inc. (NYSE:PM).
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.