Vanguard Growth: Large-Cap Favorite

02/17/2014 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Large-cap growth stocks—those of big companies with above-average profitability, valuation, and rates of growth—are among those most attractive at recent levels, explains fund expert Mark Salzinger, editor of The Investor's ETF Report.

In addition, large-cap growth stocks have the strongest earnings growth and lowest PEG ratio of any size-and-style segment.

Our preferred large-cap growth ETF is Vanguard Growth (VUG), which we feature in all four of our core Best Buys model portfolios. It has fairly broad coverage of growth stocks, with more than 350 holdings. Its expense ratio is a miniscule 0.10%.

It has been one of the better performers, with three- and five-year annualized returns of 14.6% and 20.8%, respectively, versus 14.5% and 19.4%, respectively, for the S&P 500 Index (SPX). Over the past 12 months, VUG has gained 23.0%, versus 21.4% for the S&P 500.

VUG is heavy in technology and consumer-related stocks, which take up more than half combined of the portfolio. Industrials (12%), financials (12%), healthcare (10%), and energy (7%) make up most of the rest.

The portfolio is market-cap weighted, so the stocks with the highest market values get the heaviest weightings. Stocks are selected from the largest 85% of US stocks, each of which is scored on separate growth and value factors established by index provider The Center for Research In Security Prices (CRSP).

The degree of growth is assessed by reviewing short- and long-term projected earnings growth, three-year historical per-share earnings and sales growth, current investment as a percentage of company assets, and return on assets.

VUG's portfolio is designed to include one-half of large-cap stocks' overall market value, made up of the stocks with the highest scores on CRSP's growth factors.

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