Exchange-traded funds (ETFs) serve as an excellent investment vehicle for those looking to navigate the stock market effectively. They offer the advantage of diversification almost instantly and present a lower risk profile compared to investing in individual stocks. Many ETFs focus on specific sectors, industries, and emerging trends, which can align with your investment strategy.
Understanding the risk associated with ETFs is crucial, particularly in times of heightened market uncertainty. While ETFs are not immune to market downturns, their structure, which includes a variety of companies, means that the underperformance of a single entity will not drastically affect your entire investment portfolio.
If you are contemplating an ETF for your investment portfolio, the Vanguard S&P 500 Growth Index Fund ETF (VOOG 0.35%) is an excellent option, especially if you have up to $1,000 to invest. This particular ETF comprises companies from the S&P 500 known for their strong growth potential, which could lead to returns that outpace the market.
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Achieving the Perfect Balance of Stability and Growth with ETFs
This ETF includes over 200 growth-oriented companies from the S&P 500, providing investors a unique combination of stability and growth potential. Being part of the S&P 500 means these companies are among the 500 largest in the U.S. market, ensuring that they are well-established and possess greater financial stability than many younger growth stocks.
While not every company within the S&P 500 is equally robust, and there are always exceptions, most have demonstrated proven business models and possess the necessary resources to withstand economic fluctuations. History has shown that the market experiences cycles of ups and downs, and companies in this ETF are generally well-positioned to manage those challenges.
Conversely, the growth emphasis of this ETF allows investors to tap into companies that are expanding rapidly and hold significant opportunities for future growth. This dynamic creates a compelling investment narrative for those looking to leverage both stability and growth.
Understanding the Tech-Heavy Nature of This ETF and Its Implications
The Vanguard S&P 500 Growth Index Fund ETF has a pronounced focus on the technology sector, making it even more technology-oriented than the standard S&P 500 index. This concentration isn’t necessarily a drawback, as the tech sector has consistently delivered substantial returns over the last decade or two. However, it does mean that investors should be prepared for the ETF’s performance to be significantly influenced by developments within the tech industry.
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Below is an overview of how the ETF is allocated across various sectors:
| Sector | Percentage of S&P 500 Growth | Percentage of S&P 500 |
|---|---|---|
| Communication Services | 14.70% | 9.40% |
| Consumer Discretionary | 12.20% | 10.50% |
| Consumer Staples | 3.80% | 5.90% |
| Energy | 0.70% | 3.30% |
| Financials | 13.20% | 14.50% |
| Health Care | 6.40% | 10.80% |
| Industrials | 8.20% | 8.30% |
| Information Technology | 37.90% | 30.70% |
| Materials | 0.50% | 2.00% |
| Real Estate | 1.30% | 2.20% |
| Utilities | 1.10% | 2.40% |
Source: Vanguard. Percentages as of Feb. 28.
If a growing trend among investors shifts towards seeking out value and dividend-paying stocks during uncertain times, this ETF might experience some short-term lagging performance. Nevertheless, its long-term growth potential remains robust and encouraging.
Exploring the Influence of the Magnificent Seven on ETF Holdings
This ETF’s significant focus on the tech sector, combined with its market capitalization weighting, results in a substantial representation of the so-called Magnificent Seven stocks, which are often regarded as some of the highest-valued entities in the market.
| Company | Percentage of S&P 500 Growth | Percentage of S&P 500 |
|---|---|---|
| NVIDIA | 11.88% | 6.07% |
| Apple | 6.52% | 7.24% |
| Microsoft | 5.95% | 5.85% |
| Meta Platforms | 5.65% | 2.88% |
| Amazon | 4.47% | 3.93% |
| Alphabet (Class A) | 3.86% | 1.97% |
| Broadcom | 3.61% | 1.84% |
| Alphabet (Class C) | 3.18% | 1.62% |
| Tesla | 3.17% | 1.62% |
| Eli Lilly | 2.81% | N/A |
| Berkshire Hathaway | N/A | 1.87% |
Source: Vanguard. Percentages as of Feb. 28. N/A indicates a stock isn’t in the opposite ETF’s top 10 holdings.
While it may raise concerns that the Magnificent Seven companies account for nearly 45% of this ETF, these firms have consistently ranked among the fastest-growing companies in the S&P 500, despite their considerable size. Their advancements in artificial intelligence (AI), growth in cloud computing, leadership in the electric vehicle (EV) market, and other cutting-edge innovations provide a strong foundation for continued growth.
The remaining two companies in the ETF’s top 10, while not part of the Magnificent Seven, also present favorable growth prospects. Broadcom is a pivotal player in the semiconductor industry, gaining prominence in recent years, and Eli Lilly stands out as a leading innovator within the healthcare sector.
Having these influential companies at the forefront of the ETF is a positive aspect for potential investors.
Proven Performance of This ETF: A Historical Perspective
Since its inception in September 2010, this ETF has consistently outperformed the broader S&P 500 index, showcasing its strong performance over time.
VOOG data by YCharts.
While expecting the ETF to maintain an average annual return of 14% over the long term may be ambitious, for illustration purposes, let’s consider an annual average of 12%, which aligns with the S&P 500’s performance since the ETF’s launch.
Under this assumption, a $1,000 investment in this ETF could grow to over $3,000 in just 10 years and approach $9,500 in 20 years, factoring in the ETF’s low expense ratio of 0.07%. When the market experiences downturns, growth stocks may struggle in the short run, but this could ultimately work in your favor as prices decline. Investing now could lead to significant rewards in the future.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
