Will This High-Growth ETF Keep Outpacing the Market?

For the last few years, earnings growth from the tech sector has been the driving engine of America’s stock market. Investors have piled into the largest tech companies, betting on the ability of AI and other emerging technologies to unlock enormous amounts of new value and create years of forward growth.

One ETF that has benefited enormously from this trend is the Vanguard Growth ETF (VUG). Let’s take a look at why VUG has done so well in recent years and whether the fund could still be a good buy today.

Key Points

• Heavy in big tech, this ETF outperformed the S&P 500 for a long time during the bull market.

• With 57% of holdings in tech, Vanguard’s growth ETF is concentrated but the risk has produced high returns.

What’s in the VUG ETF?

VUG is a growth fund that tracks the CRSP Large Cap Growth Index in order to give investors easy access to a selection of fast-growing American businesses. The fund is significantly smaller than something like an S&P 500 or total market fund in terms of the number of stocks it contains. Right now VUG is composed of 180 individual stocks.

Unsurprisingly, its focus on growth stocks has caused VUG to be very concentrated in the technology sector. At the moment, 57.5% of the fund’s holdings are in technology stocks. The next-closest sector in terms of concentration is consumer discretionary, which accounts for a much smaller 20.5 percent of VUG’s total.

Almost all of the fund’s top holdings are major companies from the tech sector. The top 10 stocks in VUG are as follows:

• Apple (NASDAQ:AAPL)
• Microsoft (NASDAQ:MSFT)
• NVIDIA (NASDAQ:NVDA)
• Amazon (NASDAQ:AMZN)
• Facebook (NASDAQ:META)
• Tesla (NASDAQ:TSLA)
• Alphabet Class A (NASDAQ:GOOGL)
• Alphabet Class C (NASDAQ:GOOG)
• Eli Lilly (NYSE:LLY)
• Visa (NYSE:V)

Within these top holdings, it’s once again notable how concentrated the VUG portfolio is. The top three stocks in the portfolio alone make up 32.7% of its assets, and this number expands to 45.7% when the top five are taken into account.

VUG’s Been a Massive Winner

Thanks to the surge in tech stock prices due to investor enthusiasm around AI, VUG has sharply outperformed the S&P 500 over the past few years.

On a trailing 5-year basis, VUG has generated an annualized return of 19.0 percent. The Vanguard S&P 500 ETF (VOO) has also fared well over this period, but its annualized returns are a good bit lower at 16.8 percent.

VUG, however, may be in for a weaker period ahead. In the past three months, the fund’s price has fallen by 12.9 percent as the major tech stocks that make up the majority of its holdings have struggled.

DeepSeek’s new AI innovations that undermined assumptions about chip demand, new trade restrictions, worries of rising inflation and weakening consumer confidence have all taken their toll on tech’s Magnificent Seven, dragging VUG down in the process.

While these stocks could certainly rebound, it’s also quite possible that the mega-cap tech companies that have driven the stock market forward for the past few years could run out of steam this year. Analysts are increasingly warning of further drawdowns in the S&P 500 led by these stocks.

With economic pressure mounting and investors losing confidence, it’s quite likely that VUG could see further losses before it begins to recover.

Does VUG Pay a Dividend?

Although it’s primarily geared toward growth, VUG does pay a modest dividend. Right now, the fund’s yield is 0.4%. This is less than one-third of the average across the S&P 500, which currently stands at 1.3%. As such, VUG’s ability to produce current dividend income is quite limited.

VUG could, however, have considerable dividend growth potential over the long run. Alphabet and Meta both started paying dividends for the first time last year, and most of the mega-cap tech companies are sitting on extremely large cash reserves that could be put into distributions and share buybacks.

While these businesses are likely to continue focusing on growth for the foreseeable future, their potential as dividend growth drivers over many years may appeal to investors seeking long-term future income.

VUG’s Valuation

One of the problems that stems from VUG’s concentration in huge tech companies is the fact that the fund’s valuation is very high.

Right now, the fund’s overall P/E ratio is 40.9, while its earnings growth rate is 25.5. VOO, by contrast, carries a P/E of 27.5 on an earnings growth rate of 18.9 percent.

As such, investors in VUG are paying a bit of a premium price on growth compared to the broader S&P 500.

Is Now the Time to Buy VUG?

As an investment, VUG has an interesting combination of advantages and disadvantages at the moment. On the positive side, the fund is concentrated in extremely high-quality businesses. Companies like Amazon, Apple, Microsoft, Alphabet and NVIDIA occupy top positions within their fields and have wide moats.

Right now, however, may be a risky time to jump into VUG. With the market moving downward and the fund still trading at a fairly high valuation, VUG could be susceptible to outsized losses just as it has been the beneficiary of outsized gains over the past few years. This is especially true if long-lasting tariffs and a weaker economic outlook significantly curtail the growth assumptions baked into the pricing of the largest tech companies.

Diversification is also a concern with VUG right now. With over half of its assets tied up in tech stocks, the fund is highly correlated to the performance of the tech sector. For the past few years, this has actually been a strength of the fund that has allowed it to outperform the broader market. The problem, however, is that a period of stagnant growth or a recession could cause it to underperform more diversified funds like VOO that include a larger mix of stocks from different sectors.

Overall, VUG still has potential for investors who are still bullish on long-term growth from new technologies such as AI. Those who buy VUG today, however, should likely be prepared for considerable short-term volatility. With that said, the extremely large tech businesses that make up most of its portfolio almost certainly aren’t going anywhere and will likely remain valuable and productive for years or decades to come. So, while VUG certainly carries its fair share of short-term risks, the fund may be suitable as a growth asset in a well-diversified portfolio.