One of the primary advantages of investing in an exchange-traded fund (ETF) is the convenience it offers in accessing multiple high-quality stocks with a single investment.
A prime illustration of this is the Vanguard Mega Cap Growth Index Fund ETF (NYSEMKT: MGK). This Vanguard ETF exemplifies this benefit, with almost 59% of its holdings allocated to the renowned “Magnificent Seven” stocks.
Magnificent holdings
When you encounter “index fund” in the name of an ETF, it typically indicates that the ETF aims to mirror the performance of a specific index. In the case of the Vanguard Mega Cap Growth Index Fund ETF, it tracks the CRSP US Mega Cap Growth Index.
Given its focus on U.S. megacap stocks with robust growth potential, it’s unsurprising that this Vanguard ETF holds significant positions in the Magnificent Seven stocks. Microsoft is the largest holding, comprising 14.6% of the ETF’s total portfolio, closely followed by Apple at 12.69%.
Additionally, the Vanguard Mega Cap Growth Index Fund ETF allocates 7.63% of its portfolio to Amazon and a similar percentage to Nvidia, with Alphabet making up 6.97%. The remaining two members of the Magnificent Seven, Meta Platforms and Tesla, represent 5.32% and 2.67% of the fund’s assets, respectively.
As for the remaining 41% of the Vanguard ETF’s portfolio, it is invested in a diversified mix of 75 other stocks. While many of these are megacap winners such as Eli Lilly and Visa, not all meet the $200 billion market cap threshold to be categorized as megacap. For instance, the ETF holds relatively smaller stakes in companies like Boeing and Lam Research, both with market caps below $130 billion.
Much to like
Investors have plenty of reasons to favor the Vanguard Mega Cap Growth Index Fund ETF, particularly considering its remarkable performance over the past 12 months, with a surge of more than 50%.
This exceptional performance is in line with expectations given the ETF’s focus on megacap growth stocks. Notably, four of the Magnificent Seven stocks have experienced remarkable gains, with Nvidia and Meta leading the charge.
However, the appeal of this ETF extends beyond its recent performance. Over the past five years, investors have enjoyed an average annualized return of 19.59%. Since its inception in December 2007, the ETF has delivered an average annual return of 12.73%.
Moreover, Vanguard’s reputation for offering low-cost investment options holds true for this megacap ETF. With an annual expense ratio of only 0.07%, the Vanguard Mega Cap Growth Index Fund ETF stands out as a cost-effective choice. In comparison, similar funds carry an average expense ratio of 0.96%.
Is this Vanguard ETF a no-brainer buy?
The primary criticism leveled against the Vanguard Mega Cap Growth Index Fund ETF echoes the main concern surrounding the Magnificent Seven stocks: high valuation. With the ETF’s portfolio comprising 82 stocks, the average price-to-earnings ratio stands at a lofty 38.3x.
It’s worth noting that this valuation metric is based on trailing 12-month earnings, and using a forward earnings multiple would likely yield a somewhat more favorable picture. However, the premium valuation suggests that this ETF isn’t a straightforward purchase decision.
Nevertheless, megacap growth stocks, including those beyond the Magnificent Seven, hold significant potential for long-term growth. For investors seeking robust growth prospects and willing to tolerate potentially heightened volatility, the Vanguard Mega Cap Growth Index Fund ETF could present an appealing option.
