Among investment factors, the growth factor remains one of the key places to be this year and investors can get there on a cost-effective basis with the Vanguard Growth Index Fund ETF Shares (VUG).
VUG seeks to track the performance of a benchmark index that measures the investment return of the CRSP US Large Cap Growth Index.
The fund employs an indexing investment approach designed to track the performance of the index, a broadly diversified index predominantly made up of growth stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
“While the strategy itself is cheap, the stocks it holds are not. However, firms in this portfolio often warrant high valuations, as they are driven by promising growth outlooks and durable competitive advantages,” said Morningstar analyst Ryan Jackson in a recent note. “Over 91% of this portfolio boasts a wide or narrow Morningstar economic moat, illustrating the enviable market position of these companies. Some firms will fall short of their lofty expectations, but large-cap stocks tend to be priced accurately due to the wide investor attention they receive.”
Inside VUG
The $59.6 billion VUG, which is one of the largest ETFs in its category, is home to 269 stocks with a median market value of $213.3 billion.
“Because this fund doesn’t make any sector-relative adjustments, its pursuit of growth leads to some sector biases relative to the broad market,” notes Jackson. “Its tilts have proved advantageous over the past decade but may not pay off in the future. That said, this fund’s sector composition is highly representative of the Morningstar Category average, instilling confidence that its low fee will translate into solid category-relative returns.”
As is the case with many large-cap growth ETFs, VUG is overweight the technology and consumer cyclical sectors. Those groups combine for just over 63% of the Vanguard ETF’s roster. Additionally, VUG charges just 0.04% per year, or $4 on a $10,000 investment, making it one of the cheapest funds in its category.
“This strategy casts a wide net that limits its exposure to the most expensive and volatile growth stocks. Its index buffers keep stocks in the portfolio, even after they drift slightly into value territory. For example, this fund continues to fully invest in McDonald’s (MCD) even as it has steadily gotten cheaper,” according to Morningstar.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.