Vanguard is a titan in the investment world. Its index funds and exchange-traded funds (ETFs) are easy and inexpensive ways to achieve diversification.
If you're familiar with Vanguard, the first product that comes to mind is probably something like an S&P 500 index fund, its popular growth ETF, or its value ETF.
One of the lesser-known but still massive funds is the Vanguard Mid-Cap ETF (VO +0.30%) with $132.6 billion in net assets. Here's why the fund is unique and worth buying now.
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Not your typical fund
The Vanguard Mid-Cap Fund holds 338 companies and sports a 0.04% expense ratio, which is similar to the Vanguard S&P 500 ETF's (VOO +0.89%) 507 holdings and 0.03% expense ratio. However, the big differences between the Mid-Cap ETF and other top Vanguard funds are the weightings by sector and the weightings by individual stock.
The distinction is apparent if we simply look at the weights of the top 10 holdings. In the Vanguard S&P 500 ETF, the top 10 holdings, which include stocks like Apple and Microsoft, make up 32.2% of the fund. The Vanguard Growth ETF is even more concentrated with 56.2% invested in just 10 holdings. And even the Vanguard Value ETF has 23.2% invested in the top 10 stocks.
Flip over to the Mid-Cap Fund, and you'll find the largest holding makes up less than 1% of the fund, while the top 10 holdings make up just 7.6% of the fund.
Sector breakdown
The weightings by sector between the Mid-Cap ETF and the Vanguard S&P 500 ETF are very different as well.
|
Sector |
Vanguard Mid-Cap ETF |
Vanguard S&P 500 ETF |
|---|---|---|
|
Industrials |
18.0% |
8.3% |
|
Technology/Communications |
15.7% |
36.8% |
|
Consumer Discretionary |
13.0% |
10.6% |
|
Financials |
12.8% |
12.7% |
|
Health Care |
9.7% |
13.2% |
|
Real Estate |
8.4% |
2.4% |
|
Utilities |
7.9% |
2.5% |
|
Energy |
5.6% |
4.5% |
|
Consumer Staples |
4.9% |
6.6% |
|
Basic Materials |
4.0% |
2.4% |
Data source: Vanguard.
As you can see in the table, the Mid-Cap Fund sports more than double the industrials allocation, more than triple the weighting in real estate and utilities, and less than half the weight in technology/communications.
The reason is the fund doesn't reflect the most valuable companies in the same way the S&P 500 does. And it's not going to assign the largest weights to the most important value stocks or growth stocks like other ETFs would do.
Instead, the Mid-Cap Fund focuses on smaller but still sizable companies, blending value and growth, and avoiding ultra-large businesses.
The largest financials holding isn't JPMorgan Chase or Berkshire Hathaway -- its Arthur J. Gallagher. The largest technology holdings aren't Apple and Microsoft, they're Amphenol and Arista Networks. The list goes on and on.
It sounds strange on the surface, but the dynamic plays out very well in practice. A good example is looking at the energy holdings.
The mid-cap fund has a 5.6% weighting in energy, which is similar to the S&P 500 ETF's 4.5% weighting. But while around 2% of the S&P 500 is invested in ExxonMobil and Chevron, 2% of the Mid-Cap Fund is invested in Hess, Cheniere, and Baker Hughes. It's the same idea -- just using a different approach that often leads to higher risk and higher potential reward.
The sector weightings can lead to a far different performance for the Mid-Cap ETF compared to the S&P 500. For example, the Mid-Cap ETF is underperforming the broad market by quite a bit this year because the mega-cap tech stocks have contributed the bulk of the S&P 500's gains.
NYSEMKT: VO
Key Data Points
Not a foundational holding
Index funds and ETFs provide low-cost diversification and can do a great job of rounding out a portfolio. The Mid-Cap ETF -- with its specific holdings and sector weightings -- should be viewed as a tool to get exposure to companies you may normally overlook, instead of as a foundational holding to build your portfolio around.
For example, if you already own plenty of Apple stock, then buying an S&P 500 index fund will noticeably add to your Apple exposure, which you may not be looking to do. Put another way, you may end up double-dipping with the biggest companies instead of achieving true diversification.
With the Mid-Cap ETF, you're getting a small piece of many different companies you're less likely to already be invested in. In this sense, the ETF is serving a specific role in a portfolio, not just doing more of the same thing.
The Mid-Cap ETF is also a better value than the S&P 500, sporting a 17.7 price-to-earnings ratio, compared to 21.2 for the Vanguard S&P 500 ETF.
All told, the Vanguard Mid-Cap ETF is a unique option that's worth considering now.
