Beyond Nvidia and Meta Platforms: 1 Spectacular Vanguard ETF to Buy Now

Meta Platforms hit a new intraday high on Oct. 4. Investments in artificial intelligence (AI) are paying off for its core advertising business, and its augmented and virtual reality projects could have potential to contribute earnings growth down the road.

Meta is now the hottest stock in the “Magnificent Seven” — a group of the largest tech-focused companies. But not long ago, Nvidia carried the group higher. And Apple, which had been a significant market laggard earlier in the year, has staged a massive comeback and is up over 33% in the last six months.

You may be surprised to learn that every Magnificent Seven stock aside from Meta has been underperforming the S&P 500 over the last three months. The slowdown may be due to valuation concerns that earnings need to catch up with soaring stock prices. Another factor is the broadening of the market rally as stable stalwarts like Coca-Cola, Home Depot, and other blue chip components of the Dow Jones Industrial Average have been roaring higher in recent months and contributing the bulk of index gains.

It is useful to be aware of the gyrations of the broader market and major economic events so you know why a stock may be moving a certain way in the short term. But oftentimes, a lot of these movements are just noise and can distract from what investing is all about, which is putting your hard-earned savings to work in companies that can compound in value over time and maybe even return capital to investors through buybacks and dividends.

Here’s why the Vanguard Mega Cap Growth ETF (MGK 0.86%) is packed with compounding potential and is worth buying now.

Leading from the top

Investing in an ETF can be freeing because it can smooth out individual stock movements by focusing more on a specific theme, sector, or investment objective. The fund can do well even as market leadership changes. It’s less about Apple versus Microsoft or Meta Platforms versus Google parent company Alphabet and more about general industrywide growth.

Of course, lower risk can mean lower reward because big gains in a single stock can only move an ETF by so much. But overall, the pros of ETFs can outweigh their cons, especially for investors who are looking for a hands-off tool. The Vanguard Mega Cap Growth ETF is a bold bet on the top growth stocks, especially tech-focused companies.

Data source: Vanguard Group.

A whopping 62.7% of the fund is invested in just 10 holdings, which is a higher concentration than you’ll find in an index like the Nasdaq Composite or the S&P 500, or even a similar ETF like the Vanguard Growth ETF. The Growth ETF has the exact same top 10 holdings as the Mega Cap Growth ETF, just less weighting in the top names and 188 total holdings compared to just 71 in the mega cap growth ETF.

At its core, the Vanguard Mega Cap Growth ETF is a bet on the continued outperformance of the most successful and valuable companies relative to the broader indexes. The Vanguard Mega Cap growth ETF has slightly outperformed the Nasdaq Composite and S&P 500 over the last 5- and 10-year periods due to the dominance of the largest market-cap growth stocks.

There’s reason to believe these companies have what it takes to continue leading the broader market higher for years to come.

Mega-cap momentum

Mega-cap growth companies should continue doing well as long as they deliver on investor expectations. Solid earnings growth can justify a higher stock price and even valuation expansions. AI, cloud infrastructure, consumer spending, advertising revenue from social media, and enterprise software are all major trends that impact mega-cap tech stocks and are key drivers of earnings growth.

Recently, Alphabet and Meta Platforms began paying small dividends to pass along profits directly to shareholders — which is also a capital return strategy deployed by Microsoft and Apple. All four companies buy back a ton of stock to reduce the impact of stock-based compensation and avoid dilution. As these companies continue to mature, their dividends could become an increasingly important aspect of the investment thesis.

With an expense ratio of just 0.07% or $0.70 for every $1,000 invested, the Vanguard Mega Cap Growth ETF is an ultra-low-cost way to invest in the most valuable growth-oriented U.S. companies. Its top-heavy structure magnifies the impact of a single major holding. For that reason, the fund can be volatile if there’s a sell-off in multiple top holdings. Still, it’s one of those funds where investors know what they’re getting. In other words, if the fund begins underperforming the market, it’s probably because there’s a sell-off in big tech.

All told, the Vanguard Mega Cap Growth ETF is an excellent way for long-term investors to target multiple top stocks without incurring sizable fees that can reduce returns over time.