Nvidia, Apple, Alphabet, Microsoft, and Amazon Now Make Up 30.8% of VOO and 49.2% of VUG. Here's a Better Low-Cost Vanguard ETF to Buy Now.
Key Points
The U.S. is home to the world’s leading technology companies, which significantly impact its stock market indexes.
Many top companies are justifying their valuation expansions with a long runway of earnings growth.
The Vanguard Morningstar Total Stock Market is a good buy for investors looking for a diversified, ultra-low-cost ETF.
Vanguard just updated its key holdings across major exchange-traded funds (ETFs) like the Vanguard S&P 500 ETF (NYSEMKT: VOO) and Vanguard Morningstar Growth ETF (NYSEMKT: VUG).
As of Sept. 30, the Vanguard S&P 500 ETF had a staggering 30.8% weighting in just five stocks -- Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN). Those same five companies make up a mind-numbing 49.2% of the Vanguard Morningstar Growth ETF.
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Concentration in just a handful of companies may be unappealing for investors who already own mega-cap growth stocks as individual stock holdings or through ETFs and index funds.
Here's why the Vanguard Morningstar Total Stock Market ETF (NYSEMKT: VTI) offers a superior alternative to the Vanguard S&P 500 ETF and Vanguard Morningstar Growth ETF for investors who still want low-cost exposure to a basket of stocks but with less concentration in a handful of names.
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The Vanguard Morningstar Total Stock Market ETF holds 3,519 stocks
The Vanguard Morningstar Total Stock Market ETF is benchmarked to the Morningstar U.S. Total Market Index. The index holds 100% of investable U.S. equities -- from mega caps like Nvidia and Apple all the way down to small-cap and micro-caps you've probably never heard of.
Despite holding roughly seven times as many stocks as the S&P 500 (SNPINDEX: ^GSPC), the Vanguard Morningstar Total Stock Market ETF is still heavily concentrated in a handful of names. For example, it has a 27.2% combined weighting in Nvidia, Apple, Alphabet, Microsoft, and Amazon, and a 36% combined weighting in just ten stocks. The largest U.S. companies have contributed outsized gains in recent years. The S&P 500 now makes up roughly 80% of the total U.S. stock market. So while the Total Stock Market ETF is more diverse than the Vanguard S&P 500 ETF, it still has roughly 80% of its weightings in the S&P 500. Meaning that its performance will vary only slightly from the index.
You can see this pattern play out over the long-term returns. The S&P 500 ETF has a 12.9% year-to-date (YTD) return, only slightly outpacing the Total Stock Market ETF's 12.5% YTD return. Over the last five years, the S&P 500 ETF has produced an 83% total return compared to a 73.2% total return for the Total Stock Market ETF because the S&P 500 significantly outperformed the other 20% of the U.S. stock market over that period.
Justifying the S&P 500's concentration
The sheer size of leading S&P 500 companies has made the returns of growth ETFs like the Vanguard Morningstar Growth ETF heavily dependent on just a handful of names. And for good reason.
Nvidia's earnings growth and profit margins are simply unparalleled for a company of its size. Apple's integrated customer base spanning enterprises, consumers, and students, and multiple products and services, gives it a very reliable, high-margin revenue stream regardless of what the economy is doing. And U.S. hyperscalers like Amazon, Alphabet, and Microsoft are leading global spending on artificial intelligence (AI), making them well-positioned to capitalize on AI monetization.
Therefore, it wouldn't surprise me if the S&P 500 became even more concentrated over time as these companies continue to support their expanding valuations with earnings growth. And I fully expect the Vanguard Growth ETF to outperform the S&P 500 ETF and Total Stock Market ETF over the ultra-long term.
VTI is a worthy alternative to VOO
Some folks may argue that an ETF's allocation is better served by concentrating on a handful of quality companies with solid growth prospects rather than over-diversifying into smaller, less-known companies.
It's a fair argument, but the risk is that many of these companies have overlapping themes -- namely, AI. So, if AI spending fades or AI's return on investment disappoints, there's correlated exposure across the broader basket of mega-cap growth stocks. In this vein, the Total Stock Market ETF is a better buy than the Vanguard S&P 500 ETF for investors seeking a catch-all way to invest in the U.S. stock market but with less exposure to today's leading growth stocks.
It's also worth mentioning that all three ETFs have expense ratios of just 0.03% -- the lowest expense ratio Vanguard offers. Meaning there's no opportunity cost (from a fee perspective) of choosing the Total Stock Market ETF over the S&P 500 ETF or Growth ETF.
Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, Vanguard Morningstar Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.