Many investors may think that exchange-traded funds (ETFs) are like the tortoise and the hare in Aesop’s fable about the race between these two unlikely competitors. In their view, ETFs can win the race in the long term if they make slow but steady progress.
This stereotype could apply to some ETFs. However, there are exceptions. A Vanguard ETF is up 40% in the last 12 months.
A mega winner
Which ETF has delivered such an impressive performance? The Vanguard Mega Cap Growth Index Fund ETF (NYSEMKT:MGK). As the name suggests, this Vanguard fund owns mega-cap stocks (with a market cap of $200 billion or more) with exceptional growth prospects.
The Vanguard Mega Cap Growth Index Fund ETF currently holds positions in 82 stocks. The median market cap of these stocks is $1.3 trillion. Stocks in the ETF portfolio have delivered average annual earnings growth of 19% over the past five years.
Despite the huge returns over the last 12 months, this Vanguard ETF has not been able to find success recently. Since its inception in December 2007, the fund has generated an average annual return of 12.72%. It has increased by an average of 19% annually over the past five years.
With the Vanguard Mega Cap Growth Index Fund ETF, you don’t have to worry about expenses eating into your profits. The annual expense ratio is a low 0.07%. The average expense ratio of similar funds is more than 13 times higher at 0.96%.
Why this Vanguard ETF continues to soar
There is a simple reason why this Vanguard ETF has risen so sharply and continues to rise steeply. Many of the stocks the company owns are highly sought after.
For example, Microsoft is the largest holding of the Vanguard Mega Cap Growth Index Fund ETF. Shares of the tech giant have risen nearly 50% in the past 12 months, fueled by a generative AI boom.
AI was a key driver for several other top stocks in the ETF. His third largest position, Amazon, has increased by over 80%. Shares of Nvidia, the ETF’s fourth-largest holding, has more than tripled in value. No. 5, Metaplatforms, is up almost 140%. No. 6, alphabetis up almost 45%.
The Vanguard Mega Cap Growth Index Fund ETF doesn’t just own technology stocks. Drug manufacturer Eli Lilly is the fund’s sixth largest holding. This big pharma stock has more than doubled in the last 12 months.
Is the Vanguard Mega Cap Growth Index Fund ETF a Clear Buy?
Given its strong momentum, the Vanguard Mega Cap Growth Index Fund ETF may seem like a natural buy right now. Is it? I would not go so far. There are two possible disadvantages to consider.
Firstly, valuation could become a problem with ETFs. The average price-to-earnings ratio of stocks in the fund’s portfolio is an astronomical 38.3. Admittedly, many of the stocks held by the ETF are experiencing rapid growth. Still, a cursory look at the expected earnings multiples of the ETF’s top holdings shows that they aren’t cheap.
Second, the Vanguard Mega Cap Growth Index Fund ETF doesn’t offer as much diversification as many other Vanguard ETFs. A whopping 58.7% of the fund is invested in technology stocks. A further 21.2% is accounted for by stocks in the consumer cyclical sector. This focus on two sectors could be problematic during an economic downturn.
I still think this Vanguard ETF is a good choice for long-term investors. However, you still need to use your brain before purchasing.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions at Alphabet, Amazon, Meta Platforms and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
This Vanguard ETF is up 40% in 12 months. Is it a breeze to buy now? was originally published by The Motley Fool