- Vanguard Mid-Cap ETF invests in mid-cap U.S. stocks.
- The ETF has little concentration risk as no one stock represent over 1.1% of its total portfolio.
- VO has better growth profile than its small-cap peer, but has a slightly inferior growth profile than its large-cap peer.
Vanguard Mid-Cap ETF (NYSEARCA:VO) owns a portfolio of mid-cap U.S. stocks. The fund seeks to tracks the result of the CRSP U.S. Mid-Cap Index. The fund has little concentration risk as its top-10 holdings only represent about 8.6% of its total portfolio. It also has better growth profile than its small-cap peer. However, its growth profile is slightly inferior than its large-cap peer. Given the fact that large-cap stocks tend to have better balance sheet and competitive positions than mid-cap stocks (we are going through a rough period of uncertainty caused by COVID-19), it may be a less risky option to invest in funds that own large-cap stocks.
A diversified portfolio of mid-cap stocks
VO tracks the CRSP U.S. Mid-Cap Index. This index selects U.S. stocks that fall between the top 70% - 85% of investable market capitalization. The index applies a market-cap weighted approach to determine the weighting of each stock in the index. This strategy results in a portfolio of about 340 stocks. VO rebalances its portfolio once every quarter. The index’s market-cap weighted approach helps it to reduce its turnover rate. In fact, its turnover rate was only about 15% in the past year. This also helps Vanguard to keep its expense ratio low (only about 0.04%). Since VO targets mid-cap stocks, concentration risk is low. As can be seen from the table below, its top-10 holdings only represent about 8.6% of its total portfolio. Its top holding Newmont (NEM) only represent about 1.1% of the total portfolio. Therefore, a weak performance of any single stock will have limited impact on VO’s portfolio.
Source: Vanguard Website
VO has good growth profile and better financial health than its small-cap peer
Mid-Cap stocks such as stocks in VO’s portfolio are usually companies that have established businesses and are still growing. In other words, they are companies with better financial positions than small-cap stocks and are still growing at a good pace. However, as can be seen from the chart below, VO’s performance lagged its large-cap peer, Vanguard Large-Cap ETF (VV), in the past 10 years. One key reason to VV’s better performance than VO is thee fund's inclusion of large-cap FAAMG stocks (Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Google (GOOG)). FAAMG stocks have been growing rapidly in the past 10 years and outperformed many other companies. In fact, these 5 stocks represent over 18% of VV’s portfolio now. Therefore, it is not surprising that VV outperformed VO in the past 10 years.
Now, let us compare the growth profile of VO, VV, and VB. As can be seen from the table below, VO’s weighted average sales growth of 6.44% and cash flow growth of 5.08% is better than Vanguard Small-Cap ETF's (VB) 4.28% and 3.90% respectively. However, its sales growth rate and cash flow growth rate is slightly less than VV’s 7.04% and 7.75% respectively.
Vanguard Mid-Cap ETF
Vanguard Large-Cap ETF
Vanguard Small-Cap ETF
Sales Growth %
Cash Flow Growth %
Source: Morningstar; Created by author
Will mid-cap ETF or large-cap ETF be a better choice in the next few years?
Looking forward, it is likely that large-cap funds may outperform VO because stocks in these large-cap funds tend to have stronger balance sheets, diversified revenue sources, and competitive positions. As Google’s former CEO Eric Schmidt states, “The strongest brands and the strongest companies will recover more quickly...the industry leader, if it’s well managed, tends to emerge stronger a year later.”
VO provides a good vehicle for investors to invest in mid-cap stocks with a low expense ratio of 0.04%. It appears that VO is a better choice than its small-cap peer VB and should continue to generate decent long-term returns when the economy recovers. However, its performance may lag its large-cap peer in a post-pandemic world. Therefore, investors may want to seek large-cap funds instead.
This article was written by
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