Investing through an exchange-traded fund (ETF) gives investors an incredible number of choices. Just like stocks, there are some ETFs that are more volatile and some that are less, some more focused on growth and some more focused on value. The list goes on.
Yet, what's similar about all of them is that they provide pre-made diversification. Even if you invest in an ETF with few holdings and centered around a specific trend, you're dividing up your eggs into different baskets. Take Cathie Wood's ETFs, for example. Her flagship Ark Innovation ETF owns only 36 stocks. Or you can invest in Vanguard's Russell 3000 ETF, which as you might have already guessed, invests in that index's 3,000 stocks. The advantage of the former is concentrated investments in disruptive technology, while the advantage of the latter is low-risk diversification.
If you're looking for a high-growth option that leans toward growth stocks but minimizes risk, the Vanguard Growth ETF (VUG 0.43%) is a no-brainer option.
Why this ETF?
It's not easy to beat the market. An ETF that tracks the S&P 500, a commonly used measure of the "market," has typically provided an annualized return of around 10% over the long term. That doesn't mean the S&P 500 gains 10% every year -- it doesn't. It goes through better and worse, great and awful years.
However, if you plug in your investment and then "set and forget," you'll end up gaining about 10% over the long haul, on average. That's an excellent rate to grow your money, especially when factoring in how it compounds annually. Most investors do well having some portion of their portfolio invested in this kind of index fund, which features about 500 of the top U.S. public companies.
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Yet, beating the market can be done. The Vanguard Growth ETF takes the idea of indexing up a notch and invests in about 200 of the largest U.S. companies, mirroring the makeup of the CRSP U.S. Large Cap Growth Index. That takes the cream of the crop and gets you exposure to the largest growth companies.
And it's still well diversified. It's focused on growth stocks, but it owns enough stocks to keep the collection broad -- everything from drugmaker Eli Lily to payment services provider Visa.
The ETF's top five holdings are Microsoft, Apple, Nvidia, Amazon, and Meta Platforms. Because it's a weighted index, these stocks make up about 50% of the ETF's total value. But the remaining 50% is spread out among many other stocks. And because it's a passively managed ETF, which means it just follows an index, it will automatically sell underperforming stocks when the index does and keep your ETF in growth mode.
Finally, the fund has an extremely low expense ratio of 0.04%, so it's cheap to own.
Outperforming the market
Actively managed funds for the most part don't beat the market in any given year. Last year, 60% underperformed the market's gains. But the Vanguard Growth fund has soundly beaten the market, on average, throughout its lifetime, leading to higher annualized gains of 11.86% over the past 20 years vs. 10.34% for the overall market.
Those small percentage points translate into a substantial discrepancy in how much money you would have made if you had invested $1,000 in it vs. a standard S&P 500 ETF two years ago.
VUG Total Return Level data by YCharts
For most investors, it still makes sense to invest in a broader market index fund. That provides a level of security that can't be beat. But if you're looking for additional investments, the Vanguard Growth ETF is a fantastic, no-brainer ETF to buy and hold forever.
