VOOG: back to a buy as the market revalues

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Thesis

Growth investors have had a tough time lately, even those who eschew stock picking and resort to index ETFs and more passive practices. Overall, however, over the past decade, growth ETFs in the broader market have performed impressively, largely taking advantage of the prolonged bull market in large-cap tech stocks. In this analysis, I examine the Vanguard S&P 500 Growth ETF (NYSEARCA:VOOG) a relatively popular investment choice for investors looking to effectively track large-cap growth stocks.

Turbulent market activity

Growth factor ETFs have become increasingly popular over the past decade as outperformance relative to the broader market has garnered investor attention and, subsequently, portfolio exposure. The rapidly growing tech sector spearheaded tech trade performance, with more traditional sectors lagging behind. Especially after the Covid-19 pandemic accelerated the digital transformation of the economy, staying long in tech stocks seemed like the obvious choice. Coupled with very loose monetary policy from the Fed, growth stocks delivered strong returns with valuations reaching levels not seen since the 2000s, with many pointing to a pullback as imminent.

So far, 2022 has been a tough year for stocks, especially the more expensive ones. All major indices are experiencing their worst first 4 months in many years, with NASDAQ facing the most selling pressure. The S&P 500 is in a correction marking -13.5% year-to-date losses, with the Nasdaq technically in a bear market, falling -21%. It is becoming clear that valuations are bound to return to historical averages and the growth factor is suffering significant losses amid the rotation into more traditional segments of the market.

Tech stocks dominate growth factor performance. As the chart below shows, the performance of VOOG, and the performance of the growth factor in general, is more or less tied to the performance of the Nasdaq, thus carrying significant technology exposure.

Chart
Data by YCharts

Identity of the fund

Vanguard’s S&P 500 Growth ETF invests in shares of the Standard & Poor’s 500 Growth Index, focusing on tracking the performance of the index, which is considered an indicator of overall U.S. growth stock returns . VOOG charges an expense ratio of 0.10% and pays a quarterly dividend yield of 0.71%, about half the yield offered by the S&P 500. VOOG is often promoted as an alternative to VUG (the ETF of Vanguard’s flagship growth) and while significantly less popular, it currently maintains approximately $7 billion in assets under management.

Like most growth-oriented ETFs, the fund shows a high degree of concentration in its top 10 holdings and increased exposure to large-cap tech. Apple and Microsoft are the fund’s two largest holdings, accounting for 26% of the total combined weighting.

Main titles

Avant-garde

Relative performance

To examine performance and volatility metrics for the purpose of assessing VOOG’s relative attractiveness, I used the tools offered by Portfolio Visualizer. First, the fund’s performance history is presented against the risk and return measures of the S&P 500 for the same period. For the simulation below and the next, an initial balance of $10,000, reinvestment of dividends and annual rebalancing were assumed, dating back to September 2010 when VOOG was created.

Despite the recent aggressive pullback, VOOG maintains its long-term performance advantage over SPDR’s S&P 500 ETF (SPY). A $10,000 investment in VOOG would have returned $53,000 versus $45,000 the S&P would have produced (15.5% versus 12.9% CAGR). In terms of risk, VOOG has a slightly higher standard deviation of 14.2% (vs 13.6% for SPY) and experienced a significantly more severe drawdown in its worst performing year (-20% vs -13% for SPY). Yet, in terms of risk-adjusted returns, VOOG outperforms over the 10-year period (Sharpe ratio of 1.05 vs. 0.99).

Fund performance

Portfolio Viewer

Along with the analysis, risk and return metrics are calculated and presented for a group of competing large-cap, compound-growth factor ETFs from VOOG, Vanguard’s most popular growth ETF (VUG), SPDR Portfolio S&P 500 Growth ETF (SPYG), iShares Russell 1000 Growth ETF (IWF) and iShares S&P 500 Growth ETF (IVW). Given the key similarities in exposure and structure between ETFs, as expected, the risk and return measures are rather homogeneous. The small differences observed are summarized below.

Relative performance

Portfolio Viewer

In terms of total return, IWF leads the pack, returning $54,639 on a $10,000 investment, with VUG offering the smallest total gains. VOOG indeed recorded the best risk-adjusted performance (shape ratio of 1.05), with SPYG, the two funds appearing almost identical and interchangeable. The worst drawdown once again belongs to VUG, along with the worst Sharpe and Sortino ratios of the bunch.

Evaluation

Growth stock valuations have fallen significantly as the market has entered bearish territory. With the NASDAQ and S&P 500 P/E multiples returning to their historical averages, a fund like VOOG becomes more attractive. While most of its larger tech holdings are still priced at a premium to market averages, there’s no doubt that companies like Apple, Microsoft, Amazon and Nvidia offer top-notch prospects for the foreseeable future.

Final Thoughts

After all, given the current oversold status of the market and the outlook for the large-cap growth factor over the next decade, an ETF like VOOG is an attractive investment option. Additionally, based on historical what-if analysis, VOOG sits firmly among competing growth ETFs, even slightly outperforming on many metrics.

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