The Vanguard 500 Index ETF (NYSEMKT: FLIGHT) is one of the most popular ETFs (Exchange Traded Funds) and for good reason. Vanguard made a name for itself by offering low-cost index mutual funds and later expanded its popular offerings to include ETFs. The nice advantage of ETFs over mutual funds is that they allow intraday trading.
The Vanguard 500 Index ETF is designed to mimic the performance of the index S&P 500, which tracks the performance of the 500 largest companies in the United States. The index is weighted by market capitalization, meaning that the larger the company, the greater the stock’s position in the index. The index also takes into account a company’s free float, so only stocks that are available to the public are taken into account when calculating company size.
The Vanguard 500 Index Fund ETF is a great introduction to investing for many people. The ETF offers investors instant diversification into the largest companies traded in the US at a low expense ratio of 0.03%.
Over the last 10 years, the ETF has generated an annual return of 12.91%.
The Vanguard ETF that outperformed the S&P
However, there is one Vanguard ETF that has significantly outperformed its better-known counterpart. This is the Vanguard S&P 500 Growth ETF (NYSEMKT:VOOG), which delivered an average annual return of 14.42% over the last decade. The expense ratio is slightly higher at 0.1%, but still very low.
The Vanguard S&P 500 Growth ETF consists of approximately 228 of the S&P 500 companies that are classified as growth stocks. These companies tend to have higher revenue growth and trade at a higher multiple compared to the S&P overall. Stocks in the Vanguard S&P 500 Growth ETF have grown returns at an annual average rate of 18.6% over the past five years and have a P/E ratio of just over 35x. By comparison, the S&P as a whole has an annual compound earnings growth rate of 13.9% over the past five years and a P/E ratio of just over 26x.
The top positions of both indexes are actually quite similar. In fact, this is the only stock in the top 10 holdings of the Vanguard 500 Index ETF that is not among the top 10 holdings in the Vanguard 500 Index Growth Fund ETF Berkshire Hathaway. The big difference, however, is that the Vanguard 500 Index Growth Fund ETF is much more concentrated in these top holdings. His top 10 holdings make up 57.6% of his total portfolio, while the top 10 holdings in the Vanguard 500 Index ETF make up 32.1% of his portfolio.
One of the strengths of a market capitalization-weighted index is that its winners become more important and its losers become less important. In other words, when stocks perform well, they become a larger part of the portfolio, while when they perform poorly, they become a smaller part of the portfolio.
Growth versus value
The Vanguard S&P 500 Growth ETF’s outperformance compared to the Vanguard 500 Index ETF can be attributed to the fact that growth stocks have outperformed value stocks over the past decade. This gap is even more pronounced when comparing the Vanguard S&P 500 Growth ETF Vanguard S&P 500 Value ETF (NYSEMKT:VOOV), which has posted an annual return of 10.49% over the past decade, compared to the 14.42% annual return of the Vanguard S&P 500 Growth ETF. Mutual fund versions of the funds date back to November 2000, with the fund tracking the S&P growth index and outperforming its value counterpart by about 1% per year.
However, growth stocks do not always outperform value stocks, as the latter tend to outperform in more difficult economic times. In fact, the Vanguard S&P 500 Value ETF has outperformed over the past three years, with a return of 12.03% compared to a return of 10.06% for the Vanguard S&P 500 Growth ETF.
However, with growth stocks dominating nine of the top 10 stocks in the Vanguard 500 Index ETF, it shows that growth stocks tend to rise to the top and become the largest companies in the world. And many of the top companies in the Vanguard S&P 500 Value ETF were once growth companies.
Two great options
The Vanguard 500 Index ETF is a classic investment that has been performing well for a long time. It can be a core portfolio holding for every investor. However, if you’re looking for more exposure to top growth and technology companies, the Vanguard S&P 500 Growth ETF is a great option that has outperformed over the last decade.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The Vanguard 500 Index Fund is great, but another Vanguard ETF has outperformed it in the last decade was originally published by The Motley Fool