Is the Vanguard Growth ETF the Easiest Method to Regularly Surpass the Performance of the S&P 500?
Vanguard Growth ETF Outperforms S&P 500 Over the Decade, but with Higher Volatility
The Vanguard Growth ETF (VOOG) and the Vanguard S&P 500 ETF (VOO) are two popular exchange-traded funds (ETFs) that offer investors different investment opportunities.
VOOG, focused on large-cap growth stocks, has a combined weighting of 80.1% in the technology, communications, and consumer discretionary sectors, compared to 53.3% for VOO. This positioning offers higher growth potential but also higher volatility.
Over recent periods, growth-focused ETFs like VOOG have outperformed the broader S&P 500 index in certain years due to strong performance in tech and communications sectors. For example, VOOG has posted a 5-year annualized return around 16.3%, slightly lower than some fastest-growing funds but generally outperforming broad market averages. In contrast, the broader VOO had a 10-year annualized return of approximately 13.8%.
However, it's important to note that growth ETFs tend to have higher volatility than the broad market ETFs like VOO. This is supported by data for similar growth funds such as Vanguard Russell 2000 Growth ETF (VTWG) which display higher volatility metrics compared to VOO—although VTWG is a small-cap growth fund rather than large-cap growth, the higher volatility trend holds similarly for growth styles.
The difference in expense ratio between the two ETFs is negligible, approximately $1 for every $10,000 invested. VOOG has a slightly higher expense ratio of 0.07%, compared to VOO's 0.03%.
The Vanguard Growth ETF's overweight in sectors such as technology and communications means it can benefit disproportionately in tech-driven bull markets but may lag during rotations to value or defensive sectors. Approximately two-thirds of the Vanguard Growth ETF is concentrated in just 15 companies, including Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, Broadcom, Tesla, Eli Lilly, Visa, Mastercard, Netflix, Costco Wholesale, and Palantir Technologies.
In summary, VOOG is likely to offer higher return potential driven by its concentration in growth-oriented sectors such as technology and consumer discretionary, but with greater volatility and risk compared to VOO, which provides more diversified exposure to both growth and value stocks in the large-cap U.S. market. Investors expecting continued rapid growth in innovation and tech sectors may favor VOOG, while those seeking broad market diversification and lower volatility would lean toward VOO.
The table provided shows the yearly performance of both ETFs from 2015 to 2022 YTD. The Vanguard Growth ETF's outperformance is largely attributed to strong performance in 2017, 2020, 2023, and 2024. However, it's important to remember that the ETF could easily underperform the S&P 500 ETF over the short term, so it's only worth approaching the fund if you have the time horizon needed to endure volatility.
Sources:
- YCharts
- Vanguard
- Morningstar
- The Motley Fool
Technology plays a significant role in the growth potential of the Vanguard Growth ETF (VOOG).
Investors seeking higher return potential, driven by growth-oriented sectors such as technology, may favor VOOG over the broader VOO.
The higher volatility of the Vanguard Growth ETF is influenced by its focus on technology and other growth sectors.
