VUG vs. VOO: Which ETF Should You Buy?

In the ever-changing world of investing, ETFs have become the preferred choice for many novice and experienced investors. ETFs are “baskets” of stocks. When you buy an ETF, you invest in all the stocks held by the ETF. Therefore, they are a convenient way to get instant diversification.

We’ll dive into two popular ETFs in this article: the Vanguard S&P 500 ETF (NYSE: VOO ) and the Vanguard Growth Index Fund ETF (NYSE: VUG ).

The underlying objectives and investment strategies for these ETFs are very different, despite both existing under the Vanguard umbrella.

The choice between VOO and VUG ultimately depends on your individual investment objectives, risk tolerance and desired level of exposure to the growing sector.

Let’s take a look at exactly what this means:

What is VOO?

Vanguard offers both of these funds, but they differ substantially in their investment objectives.

The Vanguard S&P 500 ETF is a passively managed investment vehicle designed to track the performance of the S&P 500 Index. This index tracks 500 of the largest publicly traded companies in the United States in many different sectors.

When you purchase VOO, you get a very small portion of these 500 companies, gaining exposure to a huge amount of the US stock market in one purchase. This provides instant diversification and can mitigate the risks associated with investing in a single company or sector.

VOO prioritizes long-term stability and growth by owning diverse companies. It closely mirrors the performance of the S&P 500, meaning it tends to fluctuate with the larger stock market.

For those seeking exposure to US stock markets, this makes VOO a very popular choice.

What is VUG?

Choosing between VOO and VUG largely depends on your investment timeline and risk tolerance.

The Vanguard Growth Index Fund ETF is similar to VOO, but takes a different approach. VUG is focused on capturing future growth potential in the US market. It tracks the CRSP US Large Cap Growth Index, which specifically tracks companies with high growth potential.

These companies are usually leaders in their industries and have strong revenues and growing earnings potential.

While VOO is highly diversified across multiple sectors, VUG’s portfolio tends to lean toward technology, healthcare and other high-growth industries. This focus on growth stocks can lead to higher returns, but comes with inherent volatility.

VUG holdings are more susceptible to market fluctuations than the broader VOO concentration.

VOO vs. VUG: Which fund is right for you?

VOO tends to provide more stable growth, while VUG is more volatile.

Taxes

Like all ETFs, VOO and VUG both have annual fees that pay for fund management. This is called the “expense ratio” of ETFs. Fortunately, both ETFs have relatively low fees. Currently VOO is at 0.03% while VUG is at 0.05%.

This means that more of your investment is channeled towards real growth. The lower VOO cost ratio means you’ll be able to keep even more of your profit. However, the difference between these two ETFs is so small that we don’t recommend using it as the sole deciding factor.

Risk

All investments are risky, but some are riskier than others. There are many ways to measure risk. One way to measure it is with Beta.

Beta measures the volatility of an investment compared to the general stock market. The market always has a Beta score of 1. A score lower than this suggests lower volatility than the overall market, while a Beta score greater than one suggests the opposite.

Herein lies a big difference between VOO and VUG. VOO, due to its diversified holdings, has a beta very close to 1. It tends to mirror the market well. This provides a smoother ride for your investment.

On the other hand, VUG’s focus on growth led to more volatility (and therefore more risk). VUG price fluctuations tend to be more pronounced. While this could mean higher returns, it also means lower drawdowns.

VUG’s higher volatility makes it more suitable for long-term investors who can handle market fluctuations. VOO has lower volatility, which makes it better for investors with shorter time horizons.

Historical performances

Past performance is no guarantee of how well a stock will do in the future. There have been many “trusted” stocks that have fallen from the sky over the years. However, historical performances are still something you should keep in mind.

VUG regularly exceeds VOO in the long term. Its growth orientation allows it to achieve slightly higher returns over the five- and ten-year outlook. However, the high volatility of VUG can lead to large swings along the way.

In a market downturn, VUG can dramatically underperform VOO, but it usually makes up lost ground when the market recovers. For this reason, we recommend VUG to those who can weather these downturns by holding the ETF for several years.

Smoother VOO growth works well for risk-averse investors and those with a shorter time horizon.

Top Holdings

The underlying holdings of VOO and VUG are constantly changing based on changes in the underlying indices. However, they are often somewhat similar. VUG tends to place more assets in its early holdings, while VOO spreads its assets slightly more. This explains some of the VUG volatility.

Here’s a rundown of VOO’s top 10 holdings (which currently make up just over 34% of its assets):

• • Apple Inc. (AAPL): 6.97%
  • Microsoft Corp. (MSFT): 6.54%
  • NVIDIA Corp. (NVDA): 6.20%
  • Amazon.com Inc. (AMZN): 3.45%
  • Meta Platforms Inc. (META): 2.41%
  • Alphabet Inc. Class A (GOOGL): 2.03%
  • Berkshire Hathaway Inc. Class B (BRK.B): 1.82%
  • Alphabet Inc. Class C (GOOG): 1.70%
  • Eli Lilly & Co. (LLY): 1.62%
  • Broadcom Inc. (AVGO): 1.50%

Instead, here are VUG’s top 10 holdings, which account for more than 59% of the ETF’s total assets:

• Apple (NASDAQ: AAPL )
  
  Microsoft (NASDAQ: MSFT)
  
  NVIDIA (NASDAQ: NVDA )
  
  Amazon.com Inc. (NASDAQ: AMZN)
  
  Meta (NASDAQ: META)
  
  Alphabet Inc. Class A (NASDAQ: GOOGL)
  
  Eli Lilly (NYSE: LLY)
  
  Alphabet Inc. Class C (NASDAQ: GOOG)
  
  Tesla (NASDAQ:TSLA)
  
  Visa (NYSE: V)

VOO diversification offers a smoother ride with lower volatility, but its returns could be more moderate. Conversely, VUG’s focus on growth stocks can lead to potentially amplified returns, along with increased risk due to sector concentration.

The type of investor you are should influence which ETF you choose.

Timeline of investments

A huge factor to consider when choosing between VUG and VOO is the timeline of your investment. This factor is so large that it deserves its own section. If you only remember one part of this article, it should be this section!

If you’re investing for less than five years, prioritize capital preservation. Market fluctuations can be very impact in short-term investments. If you need your money in three years, you won’t be able to wait for crises.

In these cases, VOO’s diversified holdings and lower volatility make it the better choice for short-term investors. Its emphasis on stability aims to minimize significant losses during market downturns.

You may even want to look at other ETFs, such as the SPDR S&P 500 ETF Trust (NYSE: SPY ), which is similar to VOO. We have another article on SPY vs. VOO to help you choose between these two ETFs.

If you want to buy and hold for over ten years, you have time on your side. This means you can ride out potential market volatility. While both VOO and VUG experience fluctuations, a longer time frame allows recovery from short-term dips.

VUG’s focus on growth stocks is often more attractive to long-term investors. The higher return potential is more attractive over the long term. There will be more time available to mitigate downturns and make gains.

Choosing the right ETF for you

Vanguard offers both VOO and VUG, but they have significantly different investment strategies. VOO prioritizes stability and broad market exposure, while VUG focuses on capturing growth potential.

If you are investing for a short period of time or are risk averse, choose VOO. If you plan to hold beyond ten years and don’t mind the extra volatility, go for VUG.

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