VUG: No Longer One Of The Most Likely Vanguard ETFs To Outperform

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Tom Madell
1.53K Followers

Summary

  • The Vanguard Growth ETF (VUG) has provided its investors with one of the best long-term returns as compared to other Vanguard broad-based ETFs.
  • But the tide may have started to turn; since the beginning of Sept. 2020, Value funds of all capitalizations have outperformed Large Growth funds such as VUG.
  • Investors are reminded to not invest using a rearview mirror.
  • It now appears that Vanguard Value-focused ETFs along with other Value-oriented ETFs/funds are likely to be superior choices to VUG.
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It would appear that investors may have gotten so used to Growth funds, composed of stocks of all capitalizations, leading the performance charts that they may not have noticed an important recent change. For more than a year now, many Value funds have outperformed Growth funds across the board.

I last wrote about the performance discrepancy between Growth and Value funds in March 2021. At that time, I pointed out that on a long-term basis, Growth funds had been trouncing Value funds for at least the prior decade. In fact, the 10-year annualized return for the Vanguard Growth ETF (NYSEARCA:VUG) has been a stunning 19.30% through Dec. 31, 2021 vs. 13.72% for the Vanguard's Value ETF (VTV). (All performance data in this article are annualized through year end 2021, except as noted.) But it appeared likely to me that Value funds were now going to be the place to be for the reasons I explained in that article.

Here is some important data that investors in Large Cap Growth ETFs such as VUG (as well as those mutual funds that are merely a different class of these ETFs such as VIGAX) might want to consider in deciding on their allocations to Growth vs. Value funds going forward.

Since the start of Sept. 2020, things have turned around for VUG, performance-wise, vis-a-vis other popular Vanguard ETF choices. Beginning then, VUG has underperformed VTV on an annualized basis, 25.45% vs. 29.91%. It has also underperformed the Vanguard S&P 500 ETF (VOO) over the same period by about 2.5% annualized.

And the reversal has continued thus far in 2022. Between Dec. 31, 2021 and Jan. 18th, results show still positive returns in 2022 for VTV (+0.46%) while deeply negative returns for VUG (-8.40%), not annualized.

While results for up to only 16 months cannot be considered conclusive, to see how unusual it has been for VTV to come out ahead of VUG, let's look at total returns for each over the last 5 years.

Yearly Total Returns for Two Vanguard ETFs

Year

VUG

VTV

2021

27.20

26.41

2020

40.27

2.29

2019

37.26

25.83

2018

-3.35

-5.45

2017

27.75

17.14

As the table shows, VUG has outperformed VTV in every one of the last five years. But the margin of outperformance has shrunk to its lowest level during 2021 with a gap of less than 1%. (Note: Morningstar.com's database of Large Cap funds shows that Value funds as a whole have outperformed Growth funds by a large margin, 26.22% to 20.45% in 2021, so VUG at 27.20% was an excellent performer within its category.)

Since each of these two funds' inception on Jan. 26, 2004, VUG has returned 12.14%, while VTV considerably less at 9.02%. That means that a $10,000 investment in VUG has grown to approximately $78K while the same investment in VTV has grown to only about 37K.

Given this data, then, it's no wonder that among the 20 largest stock ETFs or mutual funds with either a Growth or Value categorization, six are Growth funds, including VUG, while VTV is the only Value fund. The six growth funds have combined assets of about 1.2 trillion, with VUG at 184 billion, vs. VTV with assets of 130 billion, all as of Nov. 30. (source: The Wall Street Journal)

Investors have been clearly betting on Growth's previous performance record using a rearview mirror. However, performance trends in one direction or another do not go on indefinitely. If we go back the previous 5 years (2012-2016), we see that VTV actually outperformed VUG by a small amount, so VUG's outperformance should not be regarded as inevitable.

Investors who wish to get the best overall results within their portfolio should be looking toward future potential as opposed to just what has happened in the past. And I continue to believe, as I stated in my March 21 article, that Value has a considerably higher post-pandemic potential than Growth.

As further evidence of the drop-off for Growth funds as opposed to Value funds, consider that, even more pronounced than for VUG vs. VTV over the last 16 months, Vanguard Small Cap Growth ETF (VBK) has underperformed Vanguard's Small-Cap Value ETF (VBR) by a huge amount (21.63% vs. 41.92%). Also, Vanguard Mid-Cap Growth ETF (VOT) has underperformed Vanguard's Mid-Cap Value ETF (VOE), 28.84% vs. 35.22%. Thus, both small and mid-cap Vanguard Value ETFs have each outperformed VUG's 25.45% return over the period. This is in spite of both of small and mid-cap Vanguard Growth funds having outperformed these two Value funds by a large amount when considering the five-year period through the end of 2021.

Recommendation

Based on the above data, as well as that presented in my above cited article from March 2021, investors who may have over-allocated portions of their portfolios toward Large Cap Growth funds, such as VUG, are encouraged to consider reallocating some of such funds toward Value funds of all capitalizations, such as VTV, VBR, and VOE.

This article was written by

Tom Madell profile picture
1.53K Followers
Tom Madell, Ph.D., is the publisher of Mutual Fund/ETF Research Newsletter, a free newsletter which began publication in 1999 with thousands of readers. It has become one of the most popular mutual fund/ETF newsletters on the internet, as shown here. His site has been named as one of the "Top 12 Investment Newsletters Focusing on Mutual Funds" at mutualfunds.com , an important fund information provider, under "Fund Newsletter". Also, recently his Newsletter was recognized as one of 5 expert mutual fund resources worth following offering free, and, in its case, particularly "unbiased, useful, and original advice" at http://funds-newsletter.com/fundreference-art.htm .He is also a researcher/writer/investor whose articles have appeared on hundreds of websites, including the Wall Street Journal, USA Today, Morningstar and in the international media.His articles have been among the most popular among those posted on the Morningstar.com website by non-Morningstar employed contributors.His recommendations have an outstanding, long-standing record of success . His complete list of former articles can be accessed at http://funds-newsletter.com

Disclosure: I/we have a beneficial long position in the shares of VIGAX 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.

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