VUG vs VOO: Which Vanguard ETF Should You Buy?
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Summary:
VUG and VOO are two of the most popular exchange-traded funds (ETFs) managed by Vanguard. Although they both track the market, they track them in different ways. VOO tracks the S&P 500, whereas VUG tracks the tech-heavy CRSP Large Cap Growth Index. Your preference for VUG vs VOO might differ depending on your investment strategy, with VOO being slightly less risky.
ETFs are some of the most popular ways to invest, particularly if you are looking at a time horizon of a medium- to long-term hold. VUG and VOO are two of the most sought-after ETFs from investment management company Vanguard, which offers a plethora of ETFs with different time horizons and investment strategies.
Although they differ in some minute details, such as their fee structures, the fundamental difference is represented by the different indexes they track. In the case of VOO, the ETF tracks the S&P 500 with a larger basket of stock holdings. With VUG, the ETF tracks the CRSP Large Cap Growth Index with a smaller basket of stock holdings. Depending on how you gauge the market and what type of investor you are, you might decide that having either one or both is a good option for your portfolio.
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A quick review of ETFs
For those that aren’t familiar with ETFs or are just getting started, here is a quick review. ETFs are a type of pooled investment security that can be bought, sold, or traded like a stock. Unlike mutual funds, which are not sold on an exchange, an ETF’s ability to be bought and sold on the market makes it more liquid and cost-effective.
Many ETFs are created to track some type of index, sector, or commodities, such as the Nasdaq or the S&P 500. Passively managed ETFs have no active management. They merely track the growth of said index with a basket of stocks that reflect the movement of that index. For example, if the ETF tracks the Prime Market Growth Index, the value of the market will go up and down with the MSCI US Prime 750. Due to their passively managed nature, the fees on this type of ETF are incredibly low, particularly when compared to their mutual fund cousins.
Due to the transparency, low fees, tax efficiency, and liquidity/flexibility, ETFs are now considered an important asset that people are advised to hold in their portfolios.
VOO
The Vanguard S&P 500 ETF, or VOO, is an ETF that tracks the growth of the Standard and Poor’s 500 Index. It tracks the S&P 500 by owning a stock portfolio that represents all of the stocks being bought and sold on the S&P 500 index. In essence, VOO tries to replicate exactly the movement, either up or down, of the S&P 500. They hold a much larger amount of stocks compared with VUG, and thus a more diversified portfolio.
All of the stocks that VOO holds are large-cap stocks, meaning they are stocks in huge companies and thus very liquid. VOO is considered a large-cap growth index. As VOO tries to replicate the exact basket of stocks as the S&P 500, the management fees for VOO are as low as it gets. The current expense ratio is .03% for the VOO ETF. As VOO is attempting to replicate ALL of the S&P 500, it will have 500+ stocks in its basket. Below is a further snapshot of the VOO ETF, including everything from assets under management (AUM) to dividend yield (08/2022).
| VOO | |
|---|---|
| Number of stocks | 503 |
| AUM | $709.7 billion |
| Median market cap | $161.1 billion |
| Expense ratio | 0.03% |
| Date of inception | 9/7/2010 |
| 10-year average return | 13.76% |
| Average return/inception | 13.92% |
VUG
The Vanguard Growth ETF, or VUG, is a fund that tracks the Center for Research in Security Prices’ U.S. Large Cap Growth Index. According to CRSP themselves, “CRSP offers a series of market cap, industry sector, and value and growth style indexes. They blend advancements in academic research with industry practice and reflect the way that money managers actually invest.” Many of VUG’s total net assets are represented by companies in technology, as technology is considered to be a growth category.
The methodology used in considering CRSP and VUG
Basically, the CRSP index takes stocks that are listed in the S&P 500 that CRSP classifies as “growth” stocks that feature growing companies. VUG and CRSP use a methodology that models out stock growth factors by looking at the following qualities:
- Future long-term growth in earnings per share
- Future short-term growth in earnings per share
- Three-year historical growth in earnings
- Three-year historical growth in sales
- Current investment-to-assets ratio
- Return on assets
The VUG ETF fund is, therefore, slightly less passively managed than the VOO fund, whose purpose is to replicate the S&P 500 exactly how it is constructed. However, it’s still tracking an index, in this case, CRSP. The expense ratio is .04% rather than .03%, so it’s negligible. Due to the fact that the fund tracks the CRSP index, which is only a slice of the S&P 500, it has significantly fewer stocks than the VOO ETF in its basket of stocks. You can have a look at more of the fund through the snapshot below (08/2022).
| VUG | |
|---|---|
| Number of stocks | 206 |
| AUM | $133.8 billion |
| Median market cap | $282.2 billion |
| Expense ratio | 0.04% |
| Date of inception | 1/26/2004 |
| 10-year average return | 15.15% |
| Average return/inception | 10.30% |
Why is the 10-year average return so different than the return since inception with VUG?
This all has to do with the timing of when the fund was conceived and what has happened in the market since then. In the case of VUG, its inception was in 2004. This predated the stock market crash of 2008, so that needs to be factored in. The stock market took such a tumble for a number of years that this would be reflected in the average returns since inception.
VOO’s inception, on the other hand, happened in 2010. This means they avoided the worst of the 2008 financial crisis; VOO’s return has been based on the incredible stock market growth in the years that followed.
So if you just look at the last 10 years, then VUG has actually returned better on average than VOO (15.15% vs. 13.92%).
Pro Tip
Remember, timing is everything as it pertains to markets. Make sure that you look at when the fund started trading and what might have happened since that time to affect the average price. Pay more attention to the 5-year average and the 10-year average than the growth since inception.
So, which should I invest in, VOO vs VUG?
If you now understand the fundamental differences between these Vanguard ETFs but don’t quite understand how they apply to your risk profile, here are some factors to consider.
Diversification = less risk
VUG’s top 10 holdings, representing over 50% of its assets, are in the technology sector. These days much of the growth in stocks is found in technology. However, as you are heavily weighted towards the technology sector and you don’t hold as many stocks as the S&P 500 (203 vs. 500+), you are not as diversified as you are with the VOO fund.
If there is a downturn in the tech sector or in any of your smaller stock basket selections, it could mean that your VUG investment’s downside risk is greater than if you just held the entire S&P 500 with VOO. Likewise, if the tech sector and your smaller basket of stocks beat the S&P 500 in general, then you will make a better return than VOO. Remember, in general, the more risk you take on, the higher the potential upside.
Expenses
Let’s be honest here, most people aren’t going to care about a .01% difference in expense ratio. Only large financial traders will register this type of price differential on their balance sheets. That being said, if you model your investment strategy to have the absolute minimum amount of expense, then the best bet is to go with VOO.
So, if you want slightly lower risk and a more diversified ETF with a cheaper expense ratio, you should go with VOO. If you want a less diversified portfolio with a costlier expense ratio but a higher possible upside heavy on tech investments, go with VUG.
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FAQ
Is VUG better than VTI (Vanguard Total Stock Market ETF)?
It depends on your risk profile, although they are pretty similar. VTI has a slightly lower expense ratio (.03%) but also lower returns since inception (around 8%).
Is VUG ETF a good investment?
If you are looking at the medium- to long-term time horizons, based on historical evidence like past performance, then yes, it is.
Are VUG and QQQ the same?
No, they are completely different funds. QQQ is passive and tracks the Nasdaq 100 index.
How many Vanguard ETFs should I own?
As many as you are comfortable with and your advisor recommends.
Does VUG pay a dividend?
VUG has a dividend yield of .055%.
Will VUG stock go up?
No one can predict the future, but as long as the top tech companies grow in the future, VUG should grow with it.
Key takeaways
- VUG and VOO are two ETFs offered by Vanguard. Both take advantage of the indexing investment method.
- VOO tracks the entire S&P 500, and VUG tracks the CRSP Large Cap Growth Index, which is a growth ETF.
- VOO would be considered less risky as it is more diversified, where VUG is more heavily focused on tech stocks.
- They have different expense ratios of .04% versus .03%, which is negligible for the majority of retail traders.
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