Thinking about expanding your investment portfolio? With so many options out there, it can be tough to decide which one is right for you. Let’s dive into two popular ETFs – VUG and VOO – to see if they align with your investment strategy.
Investing is a great way to grow your wealth. Financial advisors and numerous financial books often recommend it as a reliable method. Whether you’re looking to boost your savings, prepare for retirement, or increase your passive income, investing is a common route. But with all the investment products available, how do you choose the right one? What’s a safe and sound investment strategy for both beginners and seasoned investors?
This article compares VUG and VOO, highlighting their differences and how they might fit your needs. This can help you navigate the investment world more confidently. So, let’s get started.
Exchange-Traded Funds (ETFs) are a great way to diversify your investments, reduce risks, and benefit from capital appreciation. Vanguard offers some of the most well-known low-cost ETFs, including Vanguard Growth ETF (VUG) and Vanguard S&P 500 ETF (VOO).
VUG tracks the CRSP US large-cap growth index, focusing on big and medium-cap stocks with growth characteristics. It uses six growth factors to select stocks, such as earnings per share (EPS) growth, return on assets, and sales per share.
VOO, on the other hand, tracks the market capitalization-weighted index of large and medium-cap stocks in the S&P 500. Both ETFs share similarities and differences worth exploring.
Platforms like M1 Finance allow you to invest in either VUG or VOO with as little as $100, with no broker fees or commissions.
VUG aims to replicate the performance of the large- and mid-cap growth stocks in its benchmark index. Initially, it tracked the MSCI US Prime Market Growth Index but switched to the CRSP index in 2013, which selects stocks based on six growth factors. Fund managers invest all assets in the growth stocks of large companies, maintaining a diversified index. VUG is ideal for those seeking growth and diversified exposure, thanks to its low expense ratio of 0.04%. However, be cautious of potential overlaps with other large- and mid-cap stocks in your portfolio. Vanguard discloses holdings monthly, which helps in managing this overlap.
VOO tracks the S&P 500 index, which includes mid- and large-cap stocks. It uses an indexing investment method to mirror the S&P 500, comprising 12% mid-cap and 88% large-cap companies. Advisors invest all assets in the index’s stocks, holding them in proportions similar to the index weighting. While VOO is not as timely as VUG in disclosing holdings, it’s effective for reinvesting earned dividends.
Both VUG and VOO trade in the US market. VOO was launched on July 9, 2010, while VUG debuted on January 26, 2004. VUG includes over 250 stocks from companies with high growth potential, making it riskier than the S&P 500 but offering better return potential. The S&P 500, tracked by VOO, includes the 500 largest publicly traded companies in the US, making it less risky due to its broader portfolio. VOO has consistently recovered from market downturns.
VUG focuses on growth companies, resulting in fewer stocks than VOO, which tracks the S&P 500 index dominated by large US companies. The S&P 500 includes a mix of value and growth companies, leading to a larger number of stocks.
The top 10 holdings of VUG make up 45.01% of its total net assets, meaning any significant changes in these stocks will greatly impact VUG’s returns. In contrast, VOO’s top 10 holdings constitute 27.21% of its total net assets. There is some overlap between the two ETFs; out of 257 companies in VUG, 180 are also in VOO.
VOO offers a higher dividend yield of 1.57%, compared to VUG’s 0.63%. This is because growth companies in VUG reinvest a significant portion of their earnings, while value companies in VOO distribute most of their profits to shareholders.
If you had invested $10,000 in January 2011, VUG would have returned $46,694 by December 2020, compared to VOO’s $36,488. This means VUG outperformed VOO by 27% over 10 years. In terms of annual returns, 2018 was the only year when both ETFs had negative growth: VUG at -3.31% and VOO at -4.5%. Between 2011 and 2020, VUG delivered better returns in seven out of nine positive years, with VOO outperforming VUG only in 2011 and 2016.
In 2020, VUG had better returns compared to VOO. Historically, VUG has shown a 27% better performance over 10 years and a 40% better performance over 15 years. Both ETFs have similar drawdowns during downturns.
Will VUG stocks continue their upward trend? There’s a good chance, but remember that past performance doesn’t guarantee future results.
Vanguard funds are popular for their low costs. VUG has an expense ratio of 0.04%, while VOO’s is 0.03%. So, for a $10,000 investment, you’d pay $4 and $3 respectively in annual management fees.
Your choice between VUG and VOO depends on your investment goals. If you’re aiming for growth, VUG is the better option, having delivered better performance over the last 10 and 15 years. However, VUG is less diversified and more volatile, heavily tilted towards tech companies. VOO offers a more diversified and stable portfolio, with a higher dividend yield.
No matter where you choose to invest, adopt a long-term approach. The stock market isn’t a get-rich-quick scheme; it takes time to see substantial returns.
Now that you understand the finer points of VUG and VOO, assess if these ETFs fit your needs. Both have their pros and cons, so consider your current financial situation and goals before making a decision. Remember, investing is a marathon, not a sprint. Start your investment journey now, and you’ll see results down the road.