Investors seeking to capitalize on the current artificial intelligence (AI) boom often consider exchange-traded funds (ETFs) as a viable option. One fund that has gained popularity is the Vanguard Russell 1000 Growth ETF (VONG), known for its low expense ratio of 0.06% and its portfolio of large U.S. companies included in the Russell 1000 Index. This ETF provides exposure to a significant number of stocks, including major players in the AI sector. However, recent analysis points to several limitations that might make it a less favorable choice for many investors.
Over the past year, VONG has lagged behind the tech-heavy Nasdaq-100 index while maintaining performance levels similar to the broader S&P 500 index. A critical examination of this fund reveals that despite its name suggesting a broad collection of stocks, it only holds 387. A striking 59% of its assets are concentrated in the technology sector, with the top five holdings—Nvidia, Apple, Microsoft, Broadcom, and Amazon—comprising nearly 43% of the total fund. This concentration raises concerns about diversification, as it suggests a heavy reliance on a few large tech names.
For investors looking for alternatives, two other Vanguard ETFs may offer better opportunities. The Vanguard Information Technology ETF (VGT), for example, focuses entirely on the technology sector, holding 317 stocks. With an expense ratio of just 0.09%, VGT has delivered impressive average annual returns of 24% over the past decade, significantly outperforming VONG, which averaged 18% during the same period.
On the other hand, for those who prefer a more diversified investment approach, the Vanguard S&P 500 ETF (VOO) presents a compelling option. This fund tracks the performance of the top 500 publicly traded U.S. companies, featuring a mix of sectors including financials, communication services, consumer discretionary, and healthcare, along with a 32.9% stake in technology. VOO has a lower expense ratio of 0.03% and has produced a respectable average annual return of 15% over the past ten years.
Investors weighing their options may find that VONG sits uncomfortably in the middle. For those committed to technology investments, VGT or a Nasdaq-100 tracking ETF could be more appealing. Meanwhile, VOO offers a straightforward pathway to diversification, potentially providing lower risk and reduced volatility in an uncertain market.
