Vanguard Growth Index Impresses Despite Concentration Risks

Vanguard Growth Index VIGAX provides a market-cap-weighted portfolio of the largest and fastest-growing companies in the U.S. market. Concentration presents some risks, but its low turnover, tight tracking, and razor-thin expense ratio make this one of the best large-growth funds available.

The fund tracks the CRSP U.S. Large Cap Growth Index, which captures the growth-oriented side of the large-cap market. Growth stocks tend to have high valuations because of positive investor sentiment around their superior growth prospects. While growth stocks constitute most 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.

Pronounced sector biases and firm-level concentration warrant consideration. As of May 2023, the fund’s top 10 holdings made up more than half of its allocation, with Apple AAPL (14%) and Microsoft MSFT (12%) accounting for 26% by themselves. Certain sector concentrations are inherent to the large-growth category, but they are even more pronounced here. The fund’s technology stake exceeded the average large-growth fund by about 9 percentage points as of May 2023. Much of that difference comes at the expense of the healthcare and financial sectors, with their allocation falling short of the fund’s average peer in recent years.

Performance has been strong since the fund started tracking its current index in April 2013. From that point through May 2023, its ETF share class outperformed its average Morningstar Category peer by more than 2 percentage points annually. Volatility was higher owing to its concentrated portfolio, but it still held a risk-adjusted-return advantage.