If you're choosing individual stocks or sectors over a broad market index, it's probably for a certain reason. Maybe it's because you think you can outperform the major benchmarks. Or it could be that you want more control over what you own. Or maybe you want to target a certain theme or trend, or a strategy like growth stocks, value, or passive income.
Investors looking for ETFs that have beaten both the S&P 500 and the Nasdaq Composite over the last year have come to the right place. Here's a closer look at the Vanguard Growth ETF (VUG 0.09%), Vanguard Mega Cap Growth ETF (MGK -0.02%), and the Vanguard Communications Services ETF (VOX 0.33%). Let's see why they are outperforming the benchmarks, and the buy case for each fund.
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1. Vanguard Growth ETF
The Vanguard Growth ETF is up 37.3% over the past year and an even better 59.1% since the start of 2023. One look at its holdings, and it's easy to see why.
Over half of the Vanguard Growth ETF is concentrated in the "Magnificent Seven," a group of seven tech-orientated companies that includes Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla.
Even while Microsoft, Tesla, and Apple have underperformed the Nasdaq Composite over the past year, the group as a whole has still crushed the index thanks to big gains in Nvidia, Meta Platforms, Amazon, and Alphabet.
Basically, any fund with high concentration in Nvidia has a good chance of beating the benchmarks over the last year given it is a large company that has posted monster gains.
The Vanguard Growth ETF includes plenty of other growth stocks from various industries. With $224 billion in net assets and an expense ratio of 0.04%, it is one of the most sizable and low-cost ways to invest in growth stocks.
2. Vanguard Mega Cap Growth ETF
If you believe that the top megacap growth companies will continue leading the market higher, consider the Vanguard Mega Cap Growth ETF.
The ETF is very top-heavy, with 76% of the fund concentrated in the top 20 holdings and a whopping 87% of the fund in tech, consumer discretionary, or healthcare stocks.
The danger of an ETF like this is that just a few companies can move the whole fund. For example, if Microsoft and Apple take a hit, chances are other top tech stocks like Salesforce and Adobe will, too. A big sell-off in Nvidia would likely impact Advanced Micro Devices and other chip stocks.
The top holdings in the fund are the usual suspects of major growth stocks. But some names may surprise you, like Costco Wholesale, McDonald's, and Boeing. With just 79 holdings, the fund is more concentrated than other Vanguard funds. For example, the Vanguard Growth ETF has 199 holdings.
Between the Vanguard Growth ETF and the Vanguard Mega Cap Growth ETF, the Vanguard Growth ETF stands out as the better option for investors looking for top growth stocks and greater diversification. But the Vanguard Mega Cap Growth ETF is the best fit if you want even more exposure to the largest growth-orientated companies instead of a wider variety that incudes smaller (but still large) growth stocks.
With a 0.07% expense ratio, the fund is still a low-cost ETF.
3. Vanguard Communications Services ETF
The Vanguard Communications Services ETF tracks the performance of the communications sector -- which has been doing extremely well.
Communications is one of the more misunderstood sectors in the market. When you think of communications, it may be movies and entertainment, media, telecommunications companies, cable and satellite companies, etc. And while these companies certainly make up a sizable chunk of the fund, the sector is dominated by Meta Platforms and Alphabet. Combined, they make up a jaw-dropping 45.8% of the Vanguard Communications Services ETF.
Both Meta Platforms and Alphabet have been crushing the market as of late. But what makes both stocks particularly attractive is that they are cash cows with growth potential, they aren't overvalued, and they both recently announced they will begin paying dividends.
Meta has done a masterful job monetizing artificial intelligence (AI), particularly through Instagram. And Alphabet, which was heavily discounted relative to the S&P 500 just a few months ago, just proved in its recent quarter why it is a high-octane cash generator with explosive growth potential in AI.
Perhaps most attractive about Meta and Alphabet is that they are inexpensive, even after their recent run-ups. Despite their high growth rates, both companies have the lowest forward price-to-earnings ratios of the Magnificent Seven stocks.
MSFT PE Ratio (Forward) data by YCharts
Investors looking for the value side of the Magnificent Seven, who also want exposure to high-yield dividend stocks and proven media winners, could consider the Vanguard Communications Services ETF and its reasonable 0.1% expense ratio.
Going with the hot hand
There are always risks associated with piling into what is working in the market. Stocks or ETFs that have been crushing the benchmarks have typically seen their valuations stretched thin. A sizable run-up is great for existing shareholders, but folks considering buying the stocks now need to make sure they are doing so for the right reasons -- namely because they believe competitive advantages are here to stay.
There's reason to believe that mega-cap growth and the Magnificent Seven can keep beating the S&P 500 and even the Nasdaq Composite for the simple fact that they have so many resources at their disposal and tend to be able to support large capital expenditures and research and development expenses. By comparison, a smaller company must be more precise and probably has more riding on a particular theme, idea, product, or service. A margin for error is crucial when embarking on the AI frontier or navigating a growth slowdown, as in the case of Apple or Tesla.
Vanguard ETFs remain an excellent low-cost way to gain exposure to what suits your personal investment objectives or interests. The three funds on this list are merely a starting point for outperforming ETFs, but there are plenty of other options to choose from as well.
