59% of This Vanguard ETF Is Invested in the "Magnificent Seven" Stocks. Is It a No-Brainer Buy Right Now?
What's the biggest advantage of investing in an exchange-traded fund (ETF)? There are several possible answers. Arguably the best one is that ETFs provide an easy way to buy multiple great stocks in one fell swoop.
The Vanguard Mega Cap Growth Index Fund ETF (NYSEMKT: MGK) is a great example. Nearly 59% of this Vanguard ETF is invested in the so-called "Magnificent Seven" stocks.
Magnificent holdings
Anytime you see "index fund" in an ETF's name, it's a dead giveaway that the ETF attempts to track the performance of an index. In the case of the Vanguard Mega Cap Growth Index Fund ETF, the targeted index is the CRSP US Mega Cap Growth Index.
With a focus on U.S. megacap stocks that offer strong growth prospects, it's not surprising that this Vanguard ETF is loaded up on Magnificent Seven stocks. Microsoft ranks as its largest holding, making up 14.6% of the ETF's total portfolio. Apple isn't far behind at 12.69%.
The Vanguard Mega Cap Growth Index Fund ETF has 7.63% of its portfolio Amazon, neck-and-neck with the 7.3% invested in Nvidia. Alphabet comes in next making up 6.97% of the ETF's portfolio. The final two members of the Magnificent Seven, Meta Platforms and Tesla, account for 5.32% and 2.67% of the fund's assets, respectively.
Where is the rest of the 41% of the Vanguard ETF's portfolio invested? The fund owns 75 other stocks. Many of them are megacap winners such as Eli Lilly and Visa. However, not all of them meet the $200 billion market cap threshold to be categorized as megacap. For example, the ETF has relatively small stakes in Boeing and Lam Research, both of which have market caps of below $130 billion.
Much to like
There's much for investors to like about the Vanguard Mega Cap Growth Index Fund ETF. That's especially true over the last 12 months, with the ETF skyrocketing more than 50%.
This sizzling performance is to be expected considering the ETF's focus on megacap growth stocks. After all, four of the Magnificent Seven stocks have vaulted over 50% higher during the last 12 months with Nvidia and Meta leading the pack.
We don't have to focus just on the fund's recent performance, though. Over the last five years, the Vanguard Mega Cap Growth Index Fund ETF has delivered an average annualized return of 19.59%. Since its inception in December 2007, the ETF's average annual return is 12.73%.
Vanguard is known for its low fees -- and this megacap ETF doesn't disappoint on that front. The Vanguard Mega Cap Growth Index Fund ETF has an annual expense ratio of only 0.07%. By comparison, the average expense ratio of similar funds is 0.96%.
Is this Vanguard ETF a no-brainer buy?
The main knock against the Vanguard Mega Cap Growth Index Fund ETF is the same as the primary drawback of the Magnificent Seven -- valuation. The average price-to-earnings ratio of the 82 stocks owned by the ETF is a sky-high 38.3x.
Granted, this is a trailing 12-month multiple. This Vanguard ETF's valuation would almost certainly look somewhat more attractive using a forward earnings multiple. However, the premium price means this ETF is not a no-brainer buy.
On the other hand, megacap growth stocks (including others outside of the Magnificent Seven) could be big winners over the long term. For investors seeking strong growth prospects who are willing to tolerate potentially high volatility, I think the Vanguard Mega Cap Growth Index Fund ETF could be a great pick.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Lam Research, Meta Platforms, Microsoft, Nvidia, Tesla, and Visa. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
59% of This Vanguard ETF Is Invested in the "Magnificent Seven" Stocks. Is It a No-Brainer Buy Right Now? was originally published by The Motley Fool
