This exchange-traded fund offers a better balance of risk and reward than a more popular alternative.
If you're reading this, you probably already know growth stocks are the most accessible way for the average person to build wealth over time. You likely also realize, however, that many growth stocks require a great deal of ongoing monitoring. That's not something most investors want to do or even have time to do.
Fortunately, there's a simple solution: Buy a basket of growth stocks that someone else updates as needed. The Vanguard Growth ETF (VUG 1.10%) is your best bet among these baskets right now.
Why the Vanguard Growth ETF
They're called exchange-traded funds, or ETFs for short. Just as the name implies, these are mutual funds in the sense that they hold several different stocks in their portfolios (so investors need only to own a stake in the fund in question). But since they're bought and sold in real time, just like conventional stocks, they're also considered exchange-traded instruments.
But why the Vanguard Growth ETF instead of similar alternatives, like the iShares Russell 1000 Growth ETF (IWF 0.81%), the iShares S&P 500 Growth ETF (IVW 0.95%), or even the popular Invesco QQQ Trust (QQQ 0.95%)?
Those exchange-traded funds have their merits, to be sure. However, the Vanguard Growth ETF boasts a handful of competitive advantages.
Chief among these advantages is its low cost to you. Its annualized expense ratio currently stands at a mere 0.04%, meaning the costs associated with managing and maintaining the fund only shave about 0.04% off the average yearly performance of the stocks held within the fund. For perspective, the Invesco QQQ Trust's expense ratio is 5 times greater at 0.2% of the fund's value, while the two iShares ETFs in question sport expense ratios similar to that of the QQQ Trust.
But does the Invesco fund's superior performance over the past 20 years make this added expense worth it?
There's no denying that shares of QQQ have been a fantastic investment in recent history. The underpinnings of these gains, however, aren't necessarily sustainable. The underlying Nasdaq-100 Index has done exceedingly well of late, largely because it comprises names like Apple, Nvidia, and Microsoft -- stocks of companies that just so happened to be in the right place at the right time, so to speak.
But many of these organizations are now starting to see slower growth rates. Being overweighted with mega-cap companies, the Nasdaq-100 could be on the verge of a prolonged period of subpar performance.
This is in slight contrast to the better-balanced Vanguard Growth ETF. It's built to reflect the performance of the CRSP (Center for Research in Security Prices) US Large Cap Growth Index, which also holds sizable stakes in the aforementioned Microsoft, Nvidia, and Apple.
But with nearly 200 different constituents, including NYSE-listed tickers like healthcare outfit Eli Lilly and credit card middleman Visa, the Vanguard Growth ETF is arguably better positioned to stand up to cyclical weakness that takes dead aim at most technology stocks.
In such a scenario, the nickels and dimes stemming from differing expense ratios can start to add up.
Well worth it
Don't misread the message. The Vanguard Growth ETF is still a growth investment and, as such, is fully capable of dishing out sea-sickening volatility. That's not apt to change in the foreseeable future. If you need stability, look elsewhere, or at least don't make this particular exchange-traded fund the bulk of your portfolio.
Conversely, don't let neglect of several seemingly small things sneak up on you and end up crimping your long-term results. The Vanguard Growth ETF offers healthy growth potential at a reasonable level of risk. It also requires no ongoing effort from you since the CRSP -- and, therefore, Vanguard -- swaps out any of the index's or fund's stocks as needed.
And that's an added benefit in and of itself of holding this fund.
See, even most veteran investors can struggle to decide when to buy or sell a stock, often doing themselves more harm than good. With a third party making scheduled rebalances of the index, though, the risk of trying to time the market is negated. This often bolsters a fund or index's overall returns by virtue of locking in partial gains on exceedingly bullish stocks or scooping up stocks while they're temporarily down.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool 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.
