- Investment research shows the mid-cap sector is the "sweet spot" of the market - yet many investors do not have adequate exposure to the category.
- With an expense ratio of only 0.07% and noting that the VOT ETF has outperformed the S&P500 over the past 10 years, it is an ideal choice for the well-diversified portfolio.
- Investors underweight the mid-cap sector should give the VOT ETF serious consideration as a core long-term holding.
The Vanguard Mid-Cap Growth ETF (NYSEARCA:VOT) is an excellent way for investors who are over-exposed to mega-caps stocks and the major broad indexes to diversify into the mid-cap sector. The #1 holding in the VOT ETF, IDEXX Laboratories (IDXX), which is the #144 stock in the S&P500. That being the case, VOT basically begins where the top-143 companies in the S&P500 leave off (VOT has a median market cap of $31.9 billion), but as compared to a standard mid-cap fund, VOT further screens the mid-cap category for the higher growth oriented companies. Over the past 10-years, this strategy has delivered a 16.7% average annual return and has outperformed the S&P500 by 50%+.
Investing in the mid-cap sector is a no-brainer for investors wanting to build a well-diversified portfolio for the long term. That's because mid-caps are literally and figuratively the "sweet spot" of the market:
Source: State Street Global Advisors
As the graphic above demonstrates, during three periods of systemic market stress (and 4th if you add covid-19), the mid-cap sector (light green on the chart) performed better than either large-caps or small-caps: going down less and quicker to recover.
US News Money cites E-Trade's Mike Loewengart's opinion that mid-cap stocks can act as a portfolio ballast in a low interest rate environment because cheaper financing is a tailwind for mid-cap growth companies. Perhaps more importantly in the current environment:
With potentially more room to run compared to large caps, they can outpace inflation.
So let's take a closer look at the VOT ETF to see how it has positioned investors for success.
The top-10 holdings in the Vanguard Mid-Cap Growth ETF are shown below and in my opinion equate to a very well-diversified 13.3% of the entire portfolio:
Source: Vanguard VOT ETF Webpage
Note the top-4 holdings are exactly the same as those in the Vanguard Mid Cap ETF (VO), but the weightings are much higher in VOT. That's because VO holds roughly 2x the number of stocks that VOT holds, because the latter screens for growth stocks only. See my Seeking Alpha article The Vanguard Mid-Cap ETF Is Ideal For Portfolio Diversification for coverage of that ETF and discussions of the top-holdings in VOT.
Synopsys (SNPS) is the #5 holding with a 1.3% weight. Synopsys is a high-flyer in the Electronic Design Automation - or EDA - market and operates what is basically a SaaS-based platform that is delivering excellent free-cash-flow (see Synopsys Has Convinced Me: I Am Upgrading To BUY). The stock is up 39% over the past year. Synopsys trades with a forward P/E = 44.3x.
MSCI (MSCI) provides market indexes and is the #7 holding with a 1.3% weight. MSCI is up 70% over the past year and currently trades with a forward P/E = 62.4x. See MSCI: Index Manager Is Flying High for a more detailed look at MSCI.
The #10 holding with a 1.2% weight is Veeva Systems (VEEV). Veeva is cloud-based global provider of data and analytics software for the life sciences sector. Veeva currently trades with a forward P/E = 80.4x and has a long history of beating consensus earnings estimates:
Source: Seeking Alpha
As can be seen by a glance at the top holdings, VOT holds some arguably highly valued companies.
The graphic below depicts VOT's capital allocation across various sectors:
Source: Vanguard VOT ETF Webpage
As can be seen, VOT has a well-diversified portfolio but the priority on growth still shows a relatively high allocation to the Technology sector, but considerably less than that of the S&P500 (~40%) or Nasdaq-100.
The chart below shows the one-year performance of the VOT ETF as compared with that of the S&P500, Dow Jones Industrial Average, and Nasdaq-100 as represented by the (SPY), (DIA), and (QQQ) ETFs, respectively:
The VOT ETF wins by a nose. Over the past three years, many investors would likely be surprised to know VOT significantly out-performed the S&P500 and DJIA, with only the triple Q's doing better:
The following chart compares the VOT ETF with its competitor the iShares Russell Mid-Cap Growth ETF (IWP):
As can be seen, the two are roughly equivalent with VOT once again winning by a hair.
VOT's long-term performance track record is shown below:
Source: Vanguard VOT ETF Webpage
As can be seen, the fund has been around since August of 2006 and has delivered excellent average annual returns for investors since that time.
The following ETF metrics were obtained directly from the Vanguard VOT ETF Webpage:
|Category||Mid-Cap Growth (Aggressive)|
|Net Assets||$24.4 Billion|
As can be seen in the graphic, with $24.4 billion in assets this fund is very liquid and - like most Vanguard ETFs - with a 0.07% expense ratio it is a very cost-efficient way for investors to get excellent diversified exposure across the mid-cap category.
The incremental risks by investing in the "growth" category within the mid-cap category are apparent by comparing the valuation metrics of the VOT ETF (center column) with those of the Vanguard Mid Cap ETF and Vanguard Mid-Cap Value ETF (VOE):
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPY, DIA, QQQ, VO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am an electronics engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.
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