The market is clearly back in a bull market and bull markets favor growth stocks and technology stocks. It’s been that way ever since S&P 500 reached its bear market bottom in October 2022, but then quickly recovered and reached new all-time highs this year. Many growth stocks that were hit by the previous downturn are bouncing back.
And one of the best proxies for these high-performing stocks is the Vanguard Growth Index Fund ETF (NYSEMKT:VUG), which follows the US large-cap growth index CRSP (Center for Research in Securities Prices). This is an index of top growth stocks whose returns have exceeded those of the S&P 500 in most periods. Here are three reasons to buy it now.
1. The economy is taking shape
This ETF follows a group of around 200 large-cap growth stocks with an average market cap of $715 billion. It has a high concentration of “Magnificent Seven” stocks, which make up more than half of the portfolio by value. However, the company is as focused on large-caps as it is growth, and its top stocks include other big-name stocks like Costco, Home DepotAnd MC Donalds. These aren’t the types of names investors typically associate with growth stocks.
Like the members of the S&P 500, these are all top US companies that play a large role in the economy. However, this ETF has fewer stocks and the stocks following it are larger and grow faster, so they play an even larger role than the rest of the stocks in the broad market index.
The economy remains stable, and while inflation is still rising faster than the Federal Reserve expected this year, analysts agree that it appears the U.S. has avoided a recession. It’s unclear how quickly the Fed will begin cutting rates, but many of these companies are currently reporting strong results. They could be outperformers this year.
2. Investors are taking risks again
As investors embrace growth stocks, they have shown they are willing to accept higher valuations. Even the price-to-earnings ratio (P/E) of the S&P 500 has risen by around 40% to just under 28 since the start of the current bull market.
And this ETF is not for the risk-averse. Its portfolio has a P/E ratio of 37, which represents a significant premium to the broader market. But its diversification and the value stocks it includes in its holdings mitigate some of that risk.
For investors interested in growth stocks and unsure of exactly how to get started, the Vanguard Growth ETF can provide the right balance of risk and reward, as you’ll see below.
3. Long-term performance tells the story
The stocks in this index are predominantly long-term winners that have a proven track record. So the Vanguard Growth fund is not only outperforming the S&P 500 in this bull market, but has also performed significantly better than the broader market over the long term. Since its inception 20 years ago, the fund has achieved an average annual return of 11.2%.
Because it is a growth-oriented investment, investors must keep in mind that this ETF will likely be subject to greater volatility than the broader market. A long-term mindset is still essential to staying ahead.
Investing in the Vanguard Growth ETF is like investing in the American growth story. Because it is an index, underperforming stocks can be replaced by higher performing stocks over time. And the ETF’s ultra-low expense ratio of 0.04% means investors lose very little of their profits to fund managers.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Vanguard Index Funds – Vanguard Growth ETF. The Motley Fool has a disclosure policy.
3 Reasons to Buy the Vanguard Growth ETF Like There’s No Tomorrow was originally published by The Motley Fool