VUG Vs. VGT: Which Vanguard ETF Is The Better Buy? (NYSEARCA:VUG) (2024)

How Are VUG And VGT Different?

The Vanguard Growth ETF (NYSEARCA:VUG) and the Vanguard Information Technology ETF (NYSEARCA:VGT) are two of the most sought-after ETFs in the market today. Interestingly, both products made their debuts on the bourses on the same day (26th Jan 2004); however, since that inception date, the former has been able to expand its AUM to over $70bn, which is over 1.5x the corresponding AUM of the latter.

As the name suggests, the Vanguard Growth ETF covers some of the US market's "largest" growth stocks. VUG's tracking index- the CRSP U.S. Large-Cap Growth Index, pursues stocks that screen highly in terms of 3-year historical sales and EPS growth, future short-term and long-term earnings growth, investment to assets ratio, and return on assets. VUG then follows a passively managed, full-replication approach whilst tracking its headline index. Currently, VUG covers around 269 stocks with the bulk of this oriented towards the tech sector (42% weight); the consumer discretionary sector (19%) and the communication services sector (14%) are the two other notable growth sectors that carry some weight here.

The Vanguard Information Technology ETF (VGT) is narrower in scope, focussing exclusively on US tech stocks that are involved in areas such as internet services, data centers, cloud networking, tech consulting, data processing, outsourcing, tech hardware, and semiconductor-related activities. The tracking index in question here is the MSCI US Investable Market Information Technology 25/50 index which VGT attempts to follow, either via full-replication, or a sampling strategy (if there are regulatory constraints). Whilst VUG is purely large-cap based, VGT does offer some exposure to mid-caps (market-cap of $12.9-$2.7bn) which contribute 6% of the portfolio, and small-caps (market-cap of $600m- $2.7bn) which contribute 1.2% of the portfolio. VGT's focus market may be narrower in scope, but it covers a wider pool of securities (357 stocks) relative to VUG.

How Have VGT And VUG Performed?

Both ETFs kicked off on the same day in early 2004, and firstly, it must be noted that both have fared exceedingly well to beat the broader markets, as represented by the SPY. With regards to the tussle between the two ETFs in focus, the tech-oriented portfolio has come out on top, delivering returns that are almost 1.5x the level of the VUG. Also consider that this outperformance has mainly kick-started since 2017 and since then it has only expanded over time.

This year as well, when risk sentiment has been quite wobbly, VGT has managed to fare marginally better than VUG, although both ETFs have delivered negative returns and have lagged the broader markets.

Closing thoughts- Is VGT or VUG The Better Buy?

Both ETFs have their merits and it's not easy to hang my hat on just one of these products, so I'll let prospective investors make a final decision after sharing some additional data and charts.

Why VUG?

Firstly, I suppose VUG may appeal to a certain class of growth-chasing investors who want to hedge their bets beyond just the tech sector which has frankly enjoyed its time in the sun for years and could be losing some of its allure. This type of diversification may be prudent at a time when the market is experiencing and is likely to experience pronounced volatility for the foreseeable future.

Then there's the cost-efficiency angle where VUG has an expense ratio that is 2x lower than VGT. This may not make much of a difference for momentum investors, but if you're in it for the long haul, a tiny variance in basis points can all add up and make a difference. Admittedly, relative to most other ETFs, both products score very highly when it comes to the efficiency ratio as the asset class median works out to 0.29% (whereas VUG is available at 0.04% and VGT at 0.08%); consequently, as per Seeking Alpha's expense grade, VUG has an A+ Grade, whilst VGT has an A Grade.

Then if you're someone who has strong beliefs in the notion of mean-reversion, you should be betting on VUG, as the risk-reward looks better here. The chart below shows how tech stocks are positioned relative to the broad growth sector. Note that from 2004, for the next 12 odd years, this ratio oscillated between the 0.875-1.05 levels. After that, there was a breakout that coalesced into a very steep uptrend, that is yet to be broken. Currently, this ratio is now at record highs and reflects well on those who have enjoyed the ride so far, but if you were looking to get in at this juncture, I'd say, the conditions aren't optimal. I wouldn't expect this ratio to transition back into its old 2004-2016 range, but surely some pullback is warranted?

To substantiate this, also consider looking at how both the tech bucket and the broader growth buckets are positioned relative to the S&P500. Both groups of stocks look somewhat stretched to the upside, but with the tech stocks, it is a lot more pronounced, currently trading at a relative strength range of between 0.89-0.975.

Note that with VUG, this ratio is currently a lot lower at 0.6x, and not too far away from falling back into its long-term ascending channel that was in place until 2020.

Finally consider looking at the respective earnings growth potential, both over the short-term (1 year) as well as the long-term (5 years). According to YCharts, VUG's constituents are expected to grow at a superior rate of over 30% in the short term (over 400bps higher than VGT's corresponding figure) and 15.4% over the long term (roughly 150bps better off than VGT's corresponding figure).

Why VGT?

Higher earnings potential typically also calls for pricier multiples, but if you're a value-conscious investor would you want to go down this route? Currently, VUG trades at an expensive forward P/E multiple of nearly 30x, this represents a 17% premium over VTI's corresponding multiple (source: YCharts). Also consider looking at the forward valuations of the top-10 stocks of both portfolios as these stocks enjoy sizeable clout within the respective portfolios (VGT's top-10 stocks account for 61% of the total portfolio, for VUG, it is 51%).

VUG's top 10 stocks trade at an exorbitant forward P/E of 46.5x, whilst for VGT, the top-10 trade at a much lower multiple of 27.8x. Admittedly, VUG's top-10 stocks are available at a deeper discount of 3% relative to their historical averages (compared to just 1% for VGT. However, I'd also urge you to consider the forward price to earnings growth ratio (PEG) which seeks to substantiate the forward P/E multiple by questioning if these stocks have the requisite forward earnings potential to justify those P/E multiples. Note that historically, tech stocks have the slightly pricier forward PEG multiples, but interestingly, the current weighted-average PEG ratio is available at a discount of 8% (1.92x), whilst VUG's stocks' weighted average PEG ratio is currently trading at a premium of 8% (2.23x).

VGT also has the better risk-adjusted return track record of the two ETFs since they began trading. I acknowledge that there's no guarantee of a repetition of the same risk-adjusted return stats, but I still find that this is a useful exercise in understanding the innate competence of a portfolio in mitigating risk and delivering returns.

Firstly, note that VGT is the more volatile portfolio of the two as exemplified by an annualized standard deviation that is 270bps higher than VUG. This higher volatility puts it in a disadvantageous position to generate superior returns (versus the risk-free rate) for every per unit of total risk. But yet still, VGT comes out on top, delivering a better Sharpe ratio than VUG. Also consider that when it comes to mitigating harmful volatility and generating excess returns (as exemplified by the Sortino ratio), the difference between the two ETFs is even more pronounced, with VGT coming out with the better figure.

Finally, I'd also highlight the income angle of these two ETFs even though growth-oriented ETFs are not noted for this facet (the sector median is around 1.4- 1.57% and both these ETFs fall short of that range); even here, VGT appears to have an edge. The current yield on offer is 0.81%, better than what you get with VUG at 0.58%. Crucially also consider that VGT does a better job of growing its dividends; over the last 3 years this has grown by 8% CAGR and over the last 5 years it has grown by 14% CAGR. VUG, in contrast, has actually seen its dividends decline by 8% and 2% during the respective periods in question.

The Alpha Sieve