With megacap growth stocks the clear market leaders of this bull market, you may think that a growth-oriented exchange-traded fund (ETF) would be crushing the performance of a value fund. Year to date, the Vanguard Growth ETF(NYSEMKT: VUG) is up a little over 10%, but the Vanguard Value ETF(NYSEMKT: VTV) is close behind with a 7.8% return. Both funds are hovering around 52-week highs.
Investors who think stock valuations are stretched may wonder if now is the time to sell out of growth stocks and transition into value. Here's a breakdown of each ETF to help you determine what's best for your portfolio.
Image source: Getty Images.
A primer on the Vanguard Growth ETF
The Vanguard Growth ETF has been a market darling and continues to outperform the S&P 500 and Nasdaq Composite. But the run-up has pushed the price-to-earnings (P/E) ratio to a lofty 41.1 and the yield down to just 0.5%.
The fund is very top-heavy, with 58% of it in just 10 holdings.
| Rank/Company | Weighting | Rank/Company | Weighting |
|---|---|---|---|
| 1. Microsoft | 12.8% | 6. Meta Platforms | 4.5% |
| 2. Apple | 11.2% | 7. Eli Lilly | 2.7% |
| 3. Nvidia | 7.8% | 8. Tesla | 2.3% |
| 4. Amazon | 6.9% | 9. Visa | 1.8% |
| 5. Alphabet | 6.3% | 10. Mastercard | 1.7% |
Data source: Vanguard.
If you're interested in megacap growth, the Vanguard Growth ETF is a good place to start.
A primer on the Vanguard Value ETF
The Vanguard Value ETF is the complete opposite of the growth ETF. It sports a P/E ratio of just 18 and a yield of 2.4%.
Its top 10 holdings comprise just 22.8% of the total fund, meaning there is more diversification, so the fund isn't so boom or bust based on a handful of companies. Notice that there is no crossover in the top 10 holdings between the Vanguard Growth ETF and the Value ETF.
| Rank/Company | Weighting | Rank/Company | Weighting |
|---|---|---|---|
| 1. Berkshire Hathaway | 3.8% | 6. Johnson & Johnson | 2% |
| 2. Broadcom | 3% | 7. Procter & Gamble | 1.9% |
| 3. JPMorgan Chase | 2.8% | 8. Merck | 1.7% |
| 4. UnitedHealth | 2.4% | 9. AbbVie | 1.6% |
| 5. ExxonMobil | 2.2% | 10. Chevron | 1.4% |
Data source: Vanguard.
While the Vanguard Growth ETF contains a lot of tech-focused companies, the Vanguard Value ETF focuses on dividend-paying companies that aren't overpriced. The fund gravitates toward sectors that tend to trade at a discount to the S&P 500 -- like financials, healthcare, industrials, consumer staples, and energy. The fund still has exposure to higher-priced sectors like technology and consumer discretionary, but it is underweight in these sectors relative to the S&P 500.
With such a value bent, you may be wondering why the sector is doing so well this year. A big reason is that sectors like financials, energy, and industrials are outperforming the S&P 500 year-to-date.
On April 1, data from the Institute for Supply Management showed that U.S. manufacturing is now expanding for the first time since September 2022. Earnings growth is strong among industrials, especially those that focus on business-to-business sales.
The solid performance from the Value ETF proves that the market rally is broader than just growth stocks.
Which ETF is best for you?
Aside from their mere 0.04% expense ratios (and the fact that both funds are run by Vanguard), the two ETFs serve completely different purposes.
The Vanguard Growth ETF is best suited for investors with a high risk tolerance and a long-term time horizon. The valuation may be high now, but many top holdings like Nvidia and Eli Lily are expected to more than double their earnings in a year.
The objective of growth investing is to pay a higher price for a company relative to its present earnings because you think earnings will be far higher in the future than they are today. Top growth stocks have a way of justifying high P/E ratios -- which has been true for many of the Vanguard Growth ETF's largest holdings that trade around all-time highs, like Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, Eli Lilly, and others.
By comparison, the Vanguard Value ETF is better suited for risk-averse investors focused on passive income and capital preservation. Many companies in this ETF reward their shareholders through buybacks, dividends, and potential capital gains rather than pouring all their capital into the business to invest in future growth.
The Vanguard Growth ETF has outperformed the Vanguard Value ETF over the last year, three-year, five-year, and 10-year time frames -- which isn't surprising, considering the broader market has largely been led by growth stocks during these periods. If the same themes continue to drive the market higher, the Growth ETF could easily continue outperforming the Value ETF over the long term.
However, that doesn't mean the Vanguard Value ETF should be avoided. It is an excellent tool that allows investors to stay involved in the market and collect passive income. It could be a worthy choice for investors who want to deploy new savings in the market but want to focus more on value and income. Or it could be a good option for investors with more exposure to tech and growth stocks than they intended because these stocks have done so well, so they could consider rebalancing by allocating new deposits to value.
Invest in value the right way
One of the biggest mistakes investors make is jumping in and out of whatever is working or not working in the market. In this vein, it isn't necessarily a good idea to sell growth stocks and buy value stocks just because the market could go down, and value stocks tend to do better in a sell-off.
A better approach is to focus on a portfolio allocation that aligns with your investment goals. Making regular contributions to an investment account provides the dry powder needed to avoid selling one stock to buy another.
All told, the Vanguard Value ETF is a better buy than the Vanguard Growth ETF if you want to add stability and reduce volatility, but that doesn't mean selling growth stocks to buy value stocks is a good idea.
Should you invest $1,000 in Vanguard Index Funds - Vanguard Growth ETF right now?
Before you buy stock in Vanguard Index Funds - Vanguard Growth ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Index Funds - Vanguard Growth ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 4, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Chevron, JPMorgan Chase, Mastercard, Merck, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, and Visa. The Motley Fool recommends Broadcom, Johnson & Johnson, and UnitedHealth Group and recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
