This growth ETF has nicely outperformed the S&P 500 since its inception.
The Vanguard 500 Index ETF (VOO 1.01%) is one of the most popular ETFs (exchange-traded funds), and for good reason. Vanguard made a name for itself by offering low-cost index mutual funds and later expanded its popular offerings to ETFs. The nice advantage ETFs have over mutual funds is that they allow for intraday trading.
The Vanguard 500 Index ETF is designed to mimic the performance of the , which tracks the performance of the 500 largest companies in the U.S. The index is market-cap-weighted, which means that the bigger the company, the larger the position the stock has in the index. The index will also adjust for a company's float, so only shares that are available to the public are counted when calculating a company's size.
The Vanguard 500 Index Fund ETF is a great introduction to investing for many people. The ETF gives investors instant diversification into the largest companies that trade in the U.S. at a low expense ratio of 0.03%.
Over the past 10 years, the ETF has generated an annual return of 12.91%.
The Vanguard ETF that has outperformed the S&P
However, there is a Vanguard ETF that has nicely outperformed its more famous counterpart. That is the Vanguard S&P 500 Growth ETF (VOOG 1.41%), which has averaged a 14.42% annual return over the past decade. It has a slightly higher expense ratio of 0.1%, but that is still very low.
The Vanguard S&P 500 Growth ETF consists of approximately 228 of the S&P 500 companies that are classified as growth stocks. These companies tend to have higher revenue growth and trade at a higher multiple compared to the S&P as whole. The stocks in the Vanguard S&P 500 Growth ETF have grown their earnings at an annual average rate of 18.6% over the past five years and have a P/E of just over 35 times. That compares to the S&P as a whole, which has an annual average earnings growth rate of 13.9% over the past five years, and has a P/E of just over 26 times.
The top holdings of both indexes are actually quite similar. In fact, the only stock in the top-10 holdings of the Vanguard 500 Index ETF that isn't a top-10 holding in the Vanguard 500 Index Growth Fund ETF is Berkshire Hathaway. The big difference, though, is that the Vanguard 500 Index Growth Fund ETF is much more concentrated in those top holdings. Its top-10 holdings account for 57.6% of its total portfolio, while the top-10 holdings in the Vanguard 500 Index ETF represent 32.1% of its portfolio.
One of the strengths of a market-cap-weighted index is that it lets its winners become more important and its losers less important. Said another way, as stocks perform well they become a bigger part of the portfolio, while when they perform poorly, they become a smaller part of the portfolio.
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Growth versus value
The outperformance of the Vanguard S&P 500 Growth ETF compared to the Vanguard 500 Index ETF can be attributed to growth stocks outperforming value stocks over the past decade. This gap is more pronounced when comparing the Vanguard S&P 500 Growth ETF to the Vanguard S&P 500 Value ETF (VOOV 0.62%), which has seen a 10.49% annual return over the past decade compared to the 14.42% annual return of the Vanguard S&P 500 Growth ETF. The mutual fund versions of the funds go back to November 2000, with the fund tracking the S&P growth index outperforming its value counterpart by about 1% a year.
That said, growth does not always outperform value, as the latter tends to outperform during more difficult economic times. In fact, the Vanguard S&P 500 Value ETF has outperformed over the past three years, with a 12.03% return versus a 10.06% return for the Vanguard S&P 500 Growth ETF.
That said, with growth stocks dominating nine of the top 10 holdings in the Vanguard 500 Index ETF, it shows that growth stocks tend to rise to the top to become the world's largest companies. And many of the top companies in the Vanguard S&P 500 Value ETF used to be growth companies at some point in time.
Two great options
The Vanguard 500 Index ETF is a classic investment that has a long history of performing well over time. It can be a core portfolio holding for any investor. However, if you're looking to get more exposure to top growth and tech companies, the Vanguard S&P 500 Growth ETF is a great option that has outperformed over the past decade.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
