The U.S. stock market currently stands on shaky ground. The stark difference between high borrowing costs and the rise of powerful growth trends like artificial intelligence (AI) and weight-loss drugs have recently drawn investors toward a small handful of large-cap stocks. Consequently, large-cap U.S. growth stocks surpassed their small- and mid-cap counterparts by more than 30 percentage points in 2023, a trend that has only gained momentum in 2024.
Speaking to this point, chipmaker Nvidia has blasted higher by 59.1% in less than two full months into 2024, and weight-loss juggernaut Eli Lilly has seen its shares climb by over 32.2% over the same period. Meta Platforms, the social media and metaverse titan, has also gotten in on the large-cap growth bonanza, with its shares up by a healthy 36.8% in 2024.
NVDA Total Return Level data by YCharts.
Meanwhile, small- and mid-cap stocks have dramatically underperformed large-cap growth stocks over the past 14 months due to a combination of sticky inflation, elevated borrowing costs, and a general aversion to risk by investors. But ignoring these stocks is undoubtedly a mistake.
Small- and mid-cap stocks have delivered superior returns compared to large caps since 1926. While this trend hasn't held true in almost 30 years, small- and mid-cap stocks should return to their market-beating ways once the Federal Reserve pivots on interest rates and these select large-cap growth stocks eventually run out of steam, leaving growth investors searching for new, more profitable avenues.
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The Vanguard fund discussed below should be a top performer once the market reverts to historical norms.
A reasonably priced growth fund
The Vanguard Mid-Cap Index Fund (VO -0.85%), or VO for short, screens as a top buy in the current financial environment. It is designed to mirror the performance of the CRSP US Mid Cap TR USD, a widely used benchmark for measuring the performance of mid-cap stocks.
That said, the VO is actually geared more toward smaller large-cap companies. Reflecting this fact, the median market cap of its portfolio stands at $27.6 billion, a figure that towers over the generally accepted upper limit of $10 billion for a mid-cap stock.
The fund boasts a diversified portfolio that comprises 333 stocks, with a significant emphasis on a select group of high-performance sectors such as industrials, technology, consumer discretionary, and financials. The VO's diversified portfolio exhibits an average earnings growth rate over the past five years of nearly 13%, a figure that is quite remarkable for this fund category.
In terms of cost effectiveness, the VO outperforms most of its peers. It features an ultra-low expense ratio of 0.04%, which is 95% lower than the category average. This low expense ratio makes the fund an attractive option for cost-conscious investors. Apart from its cost effectiveness, the VO also offers shareholders a respectable yield of 1.53% and a relatively low turnover rate of 11.8%.
The fund's portfolio is packed with reasonably priced growth stocks, making it a viable option for investors seeking growth at a reasonable price. At the time of writing, the VO's portfolio has a price-to-earnings ratio of 20.2. This is notably lower than the S&P 500, which is currently valued at nearly 24 times earnings.
Performance wise, the VO has delivered a total return (with dividends reinvested and pre-tax) of 144% over the past 10 years. While it has lagged behind the broader market, it has still generated fairly healthy returns in its own right. What's more, it seems poised to outperform once borrowing costs normalize.
All told, the VO is a top choice for investors with a long-term perspective. Its strategic focus on smaller large-cap companies, diversified portfolio, low expense ratio, and emphasis on reasonably priced growth stocks make it a compelling option in this top-heavy market.
