Even after the broader market's epic rally last week, megacap growth stocks have still gotten crushed over the past month. Microsoft, Alphabet, Amazon, Nvidia, and Tesla are now down between 13% and 28% from their 52-week highs -- highs that were mostly achieved earlier this summer.
Here's why investors looking for a broad-based approach to buying growth stocks may want to consider exchange-traded funds (ETFs) -- and some factors they should be aware of before taking a position in these low-cost investment vehicles.
Image source: Getty Images.
Betting on the best
The Vanguard Mega Cap Growth ETF (MGK -1.53%), Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG), and Vanguard Growth ETF (NYSEMKT: VUG) have been some of Vanguard's best-performing low-cost funds in recent years. But given their high concentrations in top growth names, all three funds have taken considerable hits over the past month.
Despite the recent sell-off, all three Vanguard ETFs have outperformed the Nasdaq Composite and S&P 500 over the last year.
As you can see in the chart, the funds have nearly identical performances. They also have similar expense ratios -- ranging from just 0.03% to 0.1%. The main difference is the number of stocks in each fund.
The Vanguard Mega Cap Growth ETF has 71 holdings, the Vanguard Growth ETF has 188, and the Vanguard S&P 500 Growth ETF has 232 holdings. The more holdings, the more diversified the fund and the lower the concentration in the largest companies.
It's a minor difference in the grand scheme of things since all three funds have disproportionately high weightings in their largest holdings and negligible weightings in their smallest holdings. But still, one fund may appeal more to you based on your investment objectives.
As you can see in the following table, all three funds have nearly identical weightings in their top five holdings, but they are significantly more concentrated in these megacap growth names than the Vanguard S&P 500 ETF.
|
Company |
Vanguard Mega Cap Growth ETF |
Vanguard S&P 500 Growth ETF |
Vanguard Growth ETF |
Vanguard S&P 500 ETF |
|---|---|---|---|---|
|
Microsoft |
13.6% |
12.6% |
13% |
7.2% |
|
Apple |
12.5% |
11.5% |
12% |
6.6% |
|
Nvidia |
11.7% |
11.5% |
11.3% |
6.6% |
|
Alphabet |
7.5% |
7.5% |
7.6% |
4.3% |
|
Amazon |
4.9% |
4.5% |
5% |
3.9% |
Data source: Vanguard.
Megacap tech-orientated companies have largely driven the broader market to new heights. Having nearly double the weighting in stocks like Nvidia compared to the S&P 500 has been a huge advantage for these three Vanguard funds. But it also leaves them more vulnerable to sharp drawdowns.
The downside of growth stocks
The sell-off in many megacap growth names in the past month is a useful reminder of how diversified investment products like ETFs can still be extremely volatile.
For example, the Vanguard Mega Cap Growth ETF has a high concentration in Nvidia, but it's still just 11.7%. However, it also has high weightings in other semiconductor stocks, as well as companies that are investing heavily in Nvidia chips. So, if Nvidia takes a huge hit for mostly market-based or economic reasons (not some major internal blunder), chances are a lot of other stocks will sell off, too.
The same goes for a sell-off in a stock like Microsoft, which could trigger a broader sell-off across enterprise software names. That's true as well for Amazon, which could bring down other cloud infrastructure companies.
Some of the biggest stock market mistakes occur when investors misalign their portfolios with their risk tolerance. It's easy to ride the wave of a bull market. But what happens when a stock you believe in and have a high position in falls big in a short period?
Growth stocks can do that; even the best and most valuable names out there have done it in recent years. Just look at 2022, when several top growth stocks -- including the "Magnificent Seven" -- suffered sizable losses. In fall 2022, Meta Platforms fell below $100 a share. Today, it is around $500 a share.
The lesson here is that growth stocks are capable of meteoric gains and catastrophic drawdowns. The key is to invest in the companies that can endure a slowdown and hold through periods of volatility. Investing in a growth-focused ETF helps ensure you don't miss the boat on a key market leader like Nvidia. ETFs can be useful plug-and-play tools to add to over time.
And perhaps most importantly, investing in a growth ETF can help you avoid the self-doubt that can creep in during a major sell-off.
Returning to the Meta Platforms example, the company was blowing billions of dollars a quarter on the metaverse through its Reality Labs segment while under the very serious threat of TikTok reducing engagement on Instagram. Meta Platforms had a lot of question marks, and management's commentary on the conference calls didn't exactly provide a lot of reassurance at the time.
It was understandable to let the cons outweigh the pros and dump the stock, but in hindsight, it would prove to be a major mistake. Meta has overcome its challenges and is arguably one of the best all-around growth stocks to buy today thanks to its cash cow business model, product improvements, and valuation.
A good starting point for risk-tolerant investors
Holding one of the three discussed Vanguard ETFs effectively makes it easier to stomach those moments when an individual company is going through a particularly bleak period. Another benefit is that the minimum investment in all three funds is just $1 -- meaning you can achieve diversification without putting a lot of capital to work in the market. By comparison, it would take a lot more capital to buy a full share of many top growth stocks.
Despite the advantages of the Vanguard growth-focused ETFs, they still may not be a great fit if you have a low risk tolerance or are simply more focused on capital preservation than capital accumulation. Vanguard offers value-focused ETFs, too, but you may also want to consider top dividend stocks with a track record of enduring volatility and raising their payouts.
