Market Overview

'A Sustainable Edge Against Its Peers': A Mid-Cap, High-Growth ETF From Vanguard

'A Sustainable Edge Against Its Peers': A Mid-Cap, High-Growth ETF From Vanguard

Mid-cap stocks have been only slightly less worse than large-caps this year. For example, the S&P MidCap 400 Index is lower by 2.2 percent compared to a year-to-date loss of 2.3 percent for the S&P 500. Yet some exchange traded funds indicate mid-cap growth names have been significantly better.

For example, the Vanguard Mid-Cap Growth ETF (NYSE: VOT) is lower by just 0.6 percent. VOT, which tracks the CRSP US Mid Cap Growth Index, holds 158 stocks with the mid-cap growth designation.

“The fund targets stocks representing the faster-growing and more richly valued half of the U.S. mid-cap market and weights them by market capitalization,” Morningstar said in a recent note. “These firms have attractive outlooks, but there is always a risk that they won't live up to the market's expectations. Many of the fund's holdings have not yet established sustainable competitive advantages and may not hold up as well as large caps during market downturns.”

VOT Insider Details

VOT has an annual expense ratio of just 0.07 percent, or $7 on a $10,000 investment, making it less expensive than 94 percent of competing strategies. The ETF's holdings have a median market value of $15.5 billion, which is well above the high end of mid-cap territory. That could be one reason why VOT has trailed the S&P MidCap 400 over the past 36 months.

Industrial and technology stocks combine for about 47 percent of VOT's weight, a significant overweight relative to the S&P MidCap 400, where those sectors combine for just over 33 percent. Financial services and healthcare names combine for 31.1 percent of VOT's roster. Those sectors combine for just over one-quarter of the S&P MidCap 400.

“The style orientation and industry composition of this portfolio are often similar to the Morningstar Category average, but its low fee gives it a sustainable edge against its peers,” according to Morningstar. “This cost advantage helped the fund outpace the category average by 56 basis points annualized during the trailing 10 years through March 2018, with comparable volatility.”

Some Risks

The risks associated with growth stocks include higher volatility —and if the companies do not deliver on growth expectations, investors can repudiate them. 

“High growth doesn't necessarily translate into high returns. For that to happen, firms must exceed the growth expectations already embedded in their stock prices,” Morningstar said. “That can be a tall order for the fund's holdings because their high valuations suggest that investors have high expectations for them.”

VOT carries a Silver rating from Morningstar.

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