Vanguard Mega Cap Growth provides a market-cap-weighted portfolio of the fastest-growing companies in the mega-cap market. Its razor-thin expense ratio makes it a compelling choice. Its institutional and exchange-traded fund share classes earn Morningstar Medalist Ratings of Silver.

The fund tracks the CRSP U.S. Mega Cap Growth Index, which captures the growth-oriented side of the mega-cap market. Growth stocks tend to have high valuations because of investor sentiment around their superior growth prospects. While growth stocks constitute much of the fund, value and blend stocks are also present, which should steady the fund when its growth holdings can't meet their lofty expectations.

Market-cap-weighting is an efficient way to size holdings because it harnesses the market's consensus opinion of each stock's relative value. Stocks that grow in size take up a larger share of the portfolio, while shrinking companies that may be struggling will have less importance. Generous buffers around the fund's size and style constraints improve the breadth of the portfolio and help tame turnover leading to reduced trading costs.

Some of the fund's peers include mid-cap stocks, but this fund excludes them. This has pushed its average market cap above $550 billion--$210 billion more than the Morningstar Category average as of May 2023. An emphasis on larger companies may hold it back when smaller stocks rally but should partially insulate the portfolio when markets sour since mid-cap stocks can be more volatile.

The index's narrow scope heightens firm-specific risk exposure and pronounced sector biases compared with its average peer in the large-growth category. As of May 2023, the fund's top 10 holdings made up three fifths of its portfolio, with Apple AAPL (16%) and Microsoft MSFT (15%) accounting for 31% by themselves. Certain sector concentrations are inherent to the large-growth category, but they are even more pronounced here. Technology stocks are given greater emphasis thanks to their recent relative strength. Much of that difference comes at the expense of the healthcare sector, with its allocation falling short of its average peer in recent years. 

Performance has been strong since the fund started tracking its current index in April 2013. Through May 2023, it outperformed its average category peer by nearly 3 percentage points annually over that time. Volatility was higher owing to its concentrated portfolio, but not exceedingly so, allowing the fund to post a considerable risk-adjusted-return advantage.

Analyst Rating

A mega-cap growth strategy with a quality tilt.

Associate Analyst

Zachary Evens

Apple

Microsoft

Amazon

NVIDIA

Alphabet

Tesla

Eli Lilly

Visa

This strategy efficiently harnesses the market's collective wisdom about the largest and most profitable stocks in the large-growth category. It earns an Above Average Process Pillar rating.

Above Average

Process

The Vanguard Equity Index Group boasts seasoned managers and a dedicated supporting staff well-equipped to provide tight index tracking, earning it an Above Average People Pillar Rating.

Gerard O'Reilly and Michelle Louie are the named managers on this strategy. O'Reilly, a principal at Vanguard, has been with the firm since 1992. Louie joined the firm in 2010 and has worked in investment management since 2011. She replaced Michael Johnson on this strategy in July 2021 as he moved to a different role within the firm. Vanguard frequently rotates its managers to promote breadth and depth across the team.

The managers are responsible for the fund's trading, providing more portfolio insights than a stand-alone trader. They are supported by a global team of dedicated personnel and sophisticated, scalable technology that optimize precision and reduce the managers' workload. Its independent risk management team works closely with the managers to monitor trades and review any potential issues. Managers' compensation is tied to performance using a combination of tracking error and excess return metrics, which aligns their interests with investors'.

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

High

Parent

Vanguard Mega Cap Growth ETF

MGK tracks the CRSP US Mega Cap Growth Index. The index selects stocks from the top 70% of investable market capitalization based on growth factors.

The fund tracks an index of mega-cap stocks in the US. Holdings are selected and weighed based on growth factors.

Despite recent challenges impacting profit margins, Tesla remains a strong long-term investment due to increasing demand for electric vehicles, ongoing technological innovation, and global expansion. Offering exposure to major growth companies, Vanguard's Mega Cap Growth ETF provides stability in various market conditions.

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