The Vanguard S&P 500 ETF Provides More Diverse Options Compared to the Vanguard Mega Cap Growth ETF

The Vanguard Mega Cap Growth ETF (MGK) has outperformed the Vanguard S&P 500 ETF (VOO) in one- and five-year total returns. However, it’s important to note that MGK has a higher expense ratio and focuses heavily on specific sectors.

MGK has shown robust growth recently but carries significant risks, with rising prices. Meanwhile, VOO is recognized for its lower costs, diverse holdings, and considerably higher dividend payouts.

Both ETFs target large-cap U.S. stocks, but the Mega Cap Growth ETF mainly invests in large-cap growth stocks, particularly in technology. On the other hand, the S&P 500 ETF encompasses a broader array of sectors. This comparison underscores the trade-offs involved for investors balancing performance, diversification, and returns.

Snapshots (cost and size)

Beta indicates how volatile an investment is compared to the S&P 500, calculated over five years. The one-year return refers to the total returns expected over the next twelve months.

The S&P 500 ETFs tend to be more budget-friendly, boasting an expense ratio less than half that of the mega-cap growth alternatives. Additionally, their yields are usually higher, making them appealing especially for those focused on income.

Comparing performance and risk

Over five years, the Mega Cap Growth ETF has yielded stronger returns, increasing $1,000 to $2,104. However, it also experienced a significantly greater maximum drawdown than the S&P 500 ETF, suggesting increased volatility and risk.

What’s inside

The S&P 500 ETF tracks 504 companies, providing extensive coverage of the U.S. market with around 36% in technology, 13% in financial services, and 11% in consumer cyclicals. Major players like Nvidia, Apple, and Microsoft are part of its assets, though they each hold a smaller percentage of the overall portfolio. This ETF, active for over 15 years, aims to give investors broad, low-cost exposure with minimal sector bias.

In contrast, the Mega Cap Growth ETF is more concentrated, allocating 69% to technology, 16% to consumer staples, and only 6% to industrials. The same tech giants appear here as well, but they dominate the asset distribution. With a mere 66 holdings, this ETF is heavily inclined toward mega-cap growth, which can lead to impressive returns but also less diversification and heightened exposure to shifts in the tech sector.

For further insights on ETF investing, detailed guides are available.

Stupid view

Deciding between the Vanguard S&P 500 ETF and the Vanguard Mega Cap Growth ETF can be confusing for investors.

At first glance, the higher one-year returns of the Mega Cap ETFs might seem appealing. It has notably outpaced the S&P 500 ETF in all durations up to ten years.

However, when taking a deeper look, VOO provides several advantages, beyond just its lower expense ratio. Its 504 holdings offer a more diversified portfolio compared to the 66 stocks found in the Mega Cap ETF.

The Mega Cap ETF is highly dependent on the tech sector, with 69% of its assets in that industry. While VOO has a significant 36% in technology as well, it is less vulnerable to shifts in any single sector.

Investors should consider the differing launch dates, too. The Mega Cap ETF was started in 2007, while the S&P 500 ETF came about in 2010. This means only the Mega Cap ETF faced the 2008 financial crisis, while the S&P 500 ETF has had a consistent recovery since its inception.

Nevertheless, it’s likely that the Mega Cap ETF could have shown even better returns had the start dates been the same. So, if you’re someone who can tolerate higher risk, it might be the preferable choice over the more diversified S&P 500 fund.

Glossary

ETF (Exchange Traded Fund): An investment vehicle that includes a range of assets like stocks and bonds, traded on a stock market.
Expense ratio: The yearly fee taken from shareholders as a percentage of the fund’s assets.
Diversification: Spreading investments across different assets or sectors to mitigate risk.
Dividend yield: Annual dividend income compared to the investment’s current price, expressed as a percentage.
Assets under management (AUM): The total market value of all assets managed by a fund for its investors.
Beta: A metric indicating a fund’s volatility in relation to the market; a higher beta indicates more risk.
Maximum drawdown: The largest percentage drop in a fund from its peak value to its lowest during a defined period.
Sector concentration: The proportion of a fund’s assets invested in a specific industry or sector.
Mega cap: Refers to companies with substantial market capitalizations, usually over $200 billion.
Growth stocks: Stocks expected to experience earnings growth at a rate faster than the market.
Consumer business cycle: Companies affected heavily by business cycles, such as retailers and manufacturers.
S&P500: An index representing the largest 500 publicly traded companies in the U.S.