Key Points
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The Vanguard Growth ETF (VUG) is currently 70% invested in tech stocks and riding the AI wave.
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Its biggest advantage over a pure tech fund is its ability to evolve and change to target wherever economic growth is coming from.
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Over the past three years, the Vanguard Growth ETF has averaged a 22% annual return.
- 10 stocks we like better than Vanguard Growth ETF ›
The U.S. equity market has been rolling since the beginning of 2023, with few interruptions along the way. It started with inflation peaking around mid-2022 and has accelerated with the emergence of the artificial intelligence (AI) revolution since then.
Not surprisingly, pretty much anything linked to AI has probably done incredibly well over the past few years. Semiconductor stocks may be the biggest winners. The tech sector has been a consistent leader. Even more ancillary themes, such as data center real estate investment trusts (REITs), have delivered big returns for shareholders.
If you’re looking to capture the theme more broadly, investing in a growth-oriented fund, such as the Vanguard Growth ETF (NYSEMKT: VUG), may be the better way. It captures many of these names and can pivot to whatever area of the market is driving growth at any given moment.
Why the Vanguard Growth ETF has been unstoppable lately
This exchange-traded fund takes an intelligently constructed approach to targeting growth stocks. It uses standard measures of revenue and earnings growth, but considers both backward- and forward-facing measures. On top of that, it looks at a company’s investment-to-assets ratio and its return on assets (ROA).
It looks for companies that have demonstrated financial strength in the past, are expected to continue doing so in the future, are investing in future growth, and are producing a positive return on investment. It’s a comprehensive approach that effectively targets the right companies.
Right now, those are mostly coming from the tech sector, which accounts for nearly 70% of the portfolio right now. Another 15% is coming from the consumer discretionary sector, primarily Amazon and Tesla.
That makes it very concentrated from a sector perspective, but it squarely hits the part of the economy generating the biggest growth. That’s helped the Vanguard Growth ETF deliver an average annual return of more than 22% over the past 3 years.
Why it’s a perfect buy for your long-term growth portfolio
From a long-term perspective, I prefer growth ETFs to tech ETFs. There’s nothing wrong with holding a tech ETF in your portfolio, but a growth ETF doesn’t commit to a single sector in the same way.
The current allocation to tech in the Vanguard Growth ETF is historically high. A decade ago, tech accounted for about half of what it does today. On the flip side, consumer discretionary and industrials have seen their allocations drop to about half of what they were — down to around 12% and 5%, respectively. This used to be a much more diversified fund.
That is its biggest advantage. It can pivot to wherever the growth is coming from. That makes it an evolving portfolio that changes with economic developments.
The Vanguard Growth ETF has been unstoppable for years. Its ability to adjust with the times could make it unstoppable in the future, too.
Should you buy stock in Vanguard Growth ETF right now?
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Tesla, and Vanguard Growth ETF. The Motley Fool has a disclosure policy.
