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The Vanguard Mid-Cap Growth ETF Hits The Market's 'Sweet Spot'

Michael Fitzsimmons profile picture
Michael Fitzsimmons
20.96K Followers

Summary

  • 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.

Mutual Funds Portfolio

benedek/E+ via Getty Images

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

This article was written by

Michael Fitzsimmons profile picture
20.96K Followers
Technology stocks, ETFs, portfolio strategy, renewable energy, and O&G companies. Primary goal is growing net-worth. I typically allocate a portion of my own portfolio and devote some of my SA articles to small and medium sized companies offering compelling risk/reward propositions. I am an Electronics Engineer, not a qualified investment advisor. While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. Therefore, I cannot guarantee its accuracy. I advise investors conduct their own research and due-diligence and to consult a qualified investment advisor. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles. Thanks for reading and I wish you much investment success!

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

galicianova profile picture
Michael, if the first vot stoch is in 144 position in s&p and there are about 380 stocks In VO , this mid cap covers the lower 2/3 of s&p where their weight in s&p is minuscule. Russel mid cap on the other hand has 800 stocks from 201 stock in s&p own 1000 th stock ion russel 1000. So these are quite different entities
Michael Fitzsimmons profile picture
@galicianova - the point you appear to be missing is that VOT is not a straight "Mid Cap" fund ... it is a "Mid-Cap Growth" fund (emphasis on the word "growth"). That is, VOT screens the entire mid-cap space for only those companies that have the best growth.

As a result, the fund does not own "the lower 2/3" of the S&P500 as you suggest - in fact, as reported in the article, VOT holds only 183 companies (2/3 of the S&P500 would be ~333 stocks). See the difference?
galicianova profile picture
@Michael Fitzsimmons i did not miss. i know what you say: what i meant to say was that Vo digs its stocks from the lower 2/3 and has ~ 380 stocks of the S&P and Vot digs from VO. so to precise i should have said that vot is the fat tail of S&P 500 growth. Its competition Russel mid cap growth is similarly a sub class of the 800 stocks in russel mid cap which has 4/5 stocks of russel 1000.
w
Michael, It is good that you are looking under the hood at the contents of these ETFs. You have transcended the dichotomy of fund buyers that never look at individual holdings & buyers of individual stocks that have no fund/ETF strategy.

I have been "investing" since I was about 17, and here I am an old guy, LOL. (Actually what I did at 17 was more like speculating with the money I made commercial fishing and thinking I knew a lot more than I really did, but that is another story).

The point is that the overall market is at valuations that historically seem quite expanded in terms of our metrics like PE, P/CF, etc. and I can't help but feel that there will be painful adjustments ahead. I won't be complete immune - I have a lot of higher multiple "big tech" and dividend growth equities; perhaps the majority of my equity holdings.

Yet at the same time, a lot of "big pharma" is not much north of a PE in the 12 range. Some are even lower. Also, oil and gas still doesn't even reflect current feedstock prices - probably because investors are fearful that we will see another tumble in feedstock prices -- this is something I cannot reasonably predict. But the point is that we have this market with some real disparities in value. Some areas like Pepsi/Coke seem like they are close to fair market value.

If you are a long term investor (that is my impression), what is your general strategy right now?

WD
Michael Fitzsimmons profile picture
@wdchil - well, my impression hasn't changed: investors should keep a well-diversified portfolio through thick-n-thin in order to reap what the market is willing to give them. Many investors try to time the market because of this concern of that concern, but investment research shows that ordinary investors (as well as most "professionals") severely lag broad market returns by trying to time the market - mostly because they have to be correct twice: when to get out, and when to get back in.

As for market valuations, there are lots of arguments to be made on both sides. For O&G, the returns over the past decade have been pathetic (worst sector of the entire market, by far...), have historically been very cyclical, face ESG and EV headwinds, and - in my opinion - were disrupted by technological innovation (i.e. fracking + Hz drilling) that has led to an era of energy abundance - that despite the fact that there is strong demand at the moment that has led to shortages in various regions, the oil & gas reserves are plentiful and easily accessible. As for Pepsi/Coke, I can't help thinking that investing in sugar-water may not have a great future given the severe and negative health impacts of too much sugar in a human's diet.

So - I just still with my plan: holding a well-diversified portfolio. When it comes to timing, I have proven to myself that I am much (much) better at using downside market volatility to start or to add to positions as opposed to trying to time market tops. For that reason, I always keep a healthy cash position in order to add on market sell-offs.

Thanks for reading and enjoy the rest of your Sunday!
w
@Michael Fitzsimmons Thank you. Your approach of diversifying and having short term reserves is similar to mine but it is good to have your perspective. My general feeling is that growth stocks are likely to be more valuable than they are now over the next year because valuations will probably track earnings. If that is so then I will keep readjusting the balance between "stable value" (cash, bonds, etc.) and equities. On the other hand, if we have a giant correction, I will scoop up bargains. If I was an advisor I would probably remind people of the scarecrow in Wizard of Oz. "Well, you could go that way..." LOL, WD
Michael Fitzsimmons profile picture
@wdchil - alright, well - I wish you much success.
R
Michael - Decent cap gains. Tiny-tiny yield. Dividend growth is subpar.
I think you are retired?.
If you are looking at mid-cap, may I suggest REGL?
Michael Fitzsimmons profile picture
@Ron1634 - yes, I've been retired since 2004 ... that said, as my followers know I don't put a priority on dividend income, and if the market has shown us anything over the past few years, that's a good way for retirees to lag (and severely so...) the returns the market wants to give them. In fact, after watching the non-stop pumping of dogs like XOM and AT&T on the Seeking Alpha homepage "leaderboard", it encouraged me to write the article:

Retirees Beware: Dividend Investing Is Overrated

seekingalpha.com/...

What many SA readers need to understand is that many of the dividend-based articles that end up on the SA homepage leaderboard are there not because the advice is great, but because subscription services are much more highly promoted by the site ... and (unfortunately...) many subscribers are retirees that have been brainwashed into thinking they need to focus on income even though many, due to savings, pensions, and social security, don't even need to focus on income.

I do own some strong dividend paying stocks - mostly in the energy space - but the opportunity costs of holding these companies during the biggest bull market of my life have been massive. Broadcom, on the other hand, has been the best dividend growth stock in the S&P500 and has delivered strong capital appreciation as well.

As for REGL, it is dividend centric and as a result, VOT has out-performed it by ~70% over the past 5-years.

Thanks for reading!
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