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This Vanguard ETF Is a Great Play on a Rebound in Growth Stocks

Low-cost Vanguard Growth ETF focuses on the largest and highest-growth companies in the United States.

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Vanguard Growth ETF (VUG) provides a market-cap-weighted portfolio of the largest and highest-growth companies in the U.S. equity market. Concentration presents some risks, but its low turnover, tight tracking, and razor-thin expense ratio make this one of the best large-growth funds available. Its admiral, institutional, and exchange-traded fund share classes maintain their Morningstar Analyst Ratings of Gold, while the pricier investor shares retain a Silver rating.

The fund tracks the CRSP U.S. Large Cap Growth Index, which captures the faster growing side of the large-cap market. The index selects its constituents from a pool of stocks representing the top 85% of U.S. market capitalization, and it holds the growth-oriented stocks of this pool. Generous buffers around their market capitalization and growth bounds contribute to a stable portfolio, while investor-friendly trading practices mitigate market impact costs.

Pronounced sector biases and heightened firm-specific risks warrant consideration. As of June 2022, the fund’s top 10 holdings made up nearly half of its allocation, with Apple (AAPL) (13%) and Microsoft (MSFT) (11%) accounting for 24% by themselves. The technology sector is moderately overweight compared with the category average, while energy, financial services, and healthcare are notably underweight.

While this strategy is certainly top-heavy, its overall diversification is aided slightly by the inclusion of mid-cap stocks and a few names trading at relatively lower valuations. The fund shares 9% of its holdings with this strategy’s value-oriented twin, Vanguard Value Index (VIVAX). Weaving these names into the mix may help this strategy endure periods when large growth is out of favor.

Sector biases have been a buoy to performance since the inception of this fund in 2004, but they have dragged on performance lately as its tech-heavily allocation has been out of favor through the first six months of 2022. However, its razor-thin fee and low cash drag should provide a long-term edge while keeping tracking error in check.

Key Proprietary Morningstar Metrics for Vanguard Growth ETF

Morningstar Analyst Rating: Gold
Process Pillar: Above Average
People Pillar: Above Average
Parent Pillar: High

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Zachary Evens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.