Three Vanguard ETFs Poised for Outsized Gains

Growth stocks have helped lead the market higher for much of the past two decades, and with artificial intelligence (AI) still looking like it is in the early innings, this could be the case the next decade as well. Meanwhile, the market’s recent pullback could be a good opportunity to start adding shares in some top exchange-traded funds (ETFs).

Let’s look at three Vanguard ETFs that could be poised for outsized gains in the coming years.

The Vanguard Growth ETF

If growth stocks are going to continue to lead the market higher, the Vanguard Growth ETF (VUG +0.63%) is a top investment choice. The fund is essentially invested in the growth side of the S&P 500. Its top holdings are very similar to the benchmark index, but you are getting an even heavier dose since it removes all of the value-oriented stocks. This leaves you with 160 of the top growth companies.

The ETF has been a great performer over the years, producing an average annual return of 17.4% over the past 10 years, as of the end of September, and 31.6% over the past three years.

The Vanguard Mega Cap Growth ETF

If you want to invest in only U.S. megacap growth stocks, the Vanguard Mega Cap Growth ETF (MGK +0.60%) is the ETF for you. The ETF holds just 66 stocks, with the smallest having a market capitalization (share price multiplied by shares outstanding) just below $70 billion.

Nearly 70% of the fund’s portfolio is in technology stocks, and this doesn’t even include top-10 holdings Amazon and Tesla, which are classified as consumer discretionary stocks. With the Vanguard Mega Cap Growth ETF, you are getting a heavy concentration of the top AI stocks in the U.S.

The ETF has been a strong performer, generating an average annual return of 18.3% over the past decade, and 33.2% over the last three years.

The Vanguard Information Technology ETF

Vanguard’s best-performing ETF over the past decade is the Vanguard Information Technology ETF (VGT +0.45%). The fund has generated a 691% cumulative return over the last 10 years, equal to an average annual return of nearly 23%. Meanwhile, it has produced an annualized return of 34.8% over the past three years.

The ETF invests only in tech stocks, and its top three holdings of Nvidia, Apple, and Microsoft make up 45% of its portfolio, with Nvidia a more than 18% holding. The ETF’s tech-heavy makeup positions it well to continue to outperform, but it is notably missing some top AI stocks, including Alphabet and Amazon.

Bottom line

If growth and technology stocks are going to continue to lead the market higher, each of the three Vanguard ETFs above should outperform. They are all overweight, large-cap tech stocks, and all three have strong long-term track records.

That said, I would suggest just picking one of these ETFs to invest in. Given their similarities, you aren’t really adding any diversification benefits by investing in all three. Of the trio, I prefer the Vanguard Mega Cap Growth ETF, as I think that while it has a highly concentrated portfolio, you are getting a nice collection of top AI stocks.

At the same time, with ETF investing, I also recommend using a dollar-cost averaging strategy. By consistently investing a set amount each month, regardless of whether the market is performing well or poorly, you will build wealth over time. While this won’t make you rich quickly, it can help you retire wealthy.

For example, if you were able to invest $1,000 each month into one of these ETFs and get a 15% average annual return (which is less than all of their 10-year returns), you’d have over $5.6 million after 30 years, with 94% of that coming from gains.