Essential Highlights
The VOO ETF, which tracks the S&P 500, has consistently delivered outstanding results over the years.
Performance of VOO ETF
The Vanguard Mega Cap Growth ETF has capitalized on the surge of the tech sector and the ‘Magnificent Seven’ stocks.
Is it wiser to invest in the overall market, or does the tech-dominated mega-cap growth sector still have potential for further gains?
10 investments we prefer over Vanguard’s S&P 500 ETF ›
Investing in Mega-Cap Stocks
Typically, large-cap stocks serve as an excellent foundation for a well-rounded investment portfolio. The real question is: Should that foundation consist of large firms or those that are exceptionally large?
This has become a persistent issue for the S&P 500 (SNPINDEX: ^GSPC). In the 1990s, the index was relatively well-diversified. Leading up to the dot-com bubble, the technology sector expanded to almost 30% of the index. Financials dominated the index until the real estate crisis altered that landscape. Over the last ten years, technology has once again taken the lead, now comprising roughly one-third of the index.
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Comparing Market Strategies
The heavy concentration at the top has led to a risk that makes investing solely in the largest companies of the S&P 500 potentially perilous. If one sector holds a disproportionately large portion of the index, the impact may be even more pronounced when focusing on mega-cap stocks.
The issue we face today is significant. The Vanguard S&P 500 (NYSEMKT: VOO) has become a fundamental component of numerous investment portfolios. Opting for the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) as a substitute involves specific considerations.
Two individuals analyzing financial graphs on a tablet device.
Large-Cap Stocks Overview
Source of the image: Getty Images.
Comparing the S&P 500 with Mega Cap Growth ETFs
Investing in the S&P 500 ETF (exchange-traded fund) provides exposure to the entire U.S. large-cap market. Over the last ten years, it has increasingly represented a large-cap growth index, largely due to the influence of technology stocks and the so-called “Magnificent Seven.” At present, technology accounts for 33% of the index, followed by financials at 13%, communication services at 11%, and consumer discretionary at 10%, which make up the top four sectors.
The last two sectors are also viewed as having a growth orientation. Ideally, one would prefer to see the overall market exhibit more substantial representation across various segments. Unfortunately, that is not the situation currently, but the S&P 500 remains regarded as a reflection of the U.S. economy.
The concentration of technology is even more evident within the larger mega-cap growth category. At present, this ETF has a 68% allocation to technology. The only other sector with a double-digit allocation is consumer discretionary at 16%. Investing in mega-cap growth is quite similar to simply investing in a dedicated tech ETF.
The amount of technology you choose to include in your portfolio can differ significantly, but the proportion of tech within the Vanguard Mega Cap Growth ETF is substantial for nearly any financial objective.
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David Dierking does not hold any shares in the stocks referenced. The Motley Fool owns shares in and endorses the Vanguard S&P 500 ETF. The Motley Fool adheres to a disclosure policy.
