This Vanguard ETF Could Help Grow Any Retirement Account
After the year that we’ve all been through, there’s a great sense of relief among many Americans that life will soon be returning to normal, or at least a new normal. But investors are still wary, having been through an incredibly volatile year.
According to Allianz Life Insurance Company’s Quarterly Market Perceptions Study, 74% of Americans believe markets will continue to be “very volatile” in 2021, up from 72% in the previous quarter. Meanwhile, 40% say they are too nervous to invest in the markets right now, up from 34%, and 52% believe another market crash is on the horizon.
It shows the uncertainty that is still out there, despite improving economic conditions. The good news is that if you’re saving for retirement, you don’t have to worry about short-term market volatility given your longer-term investing horizon. And there are few better long-term plays than the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK).
One of Vanguard’s best long-term performers
The Vanguard Mega Cap Growth ETF tracks the performance of the CRSP US Mega Cap Growth Index, which includes the largest stocks by market cap that have growth characteristics as determined by a range of criteria, including future long-term growth in earnings per share (EPS).
It holds 111 stocks with a median market cap of $354 billion. The top three holdings in this cap-weighted index are Apple at 11.7%, Microsoft at 11.3%, and Amazon at 8.4%. Technology stocks make up 49% of the portfolio, followed by consumer discretionary at 25%, and industrials at 13% as of March 31. About 55% of the assets are in the top 10 holdings alone.
Over the long term, this ETF has outperformed just about every other offering from Vanguard. It has a 10-year annualized return of 16.9% as of March 31, 2021 — that’s better than the Vanguard Growth ETF, which returned 16.3% per year, and the Vanguard Total Stock Market ETF, which returned 13.8% annually, to name a few of the more popular Vanguard options.
Only two of the sector/specialty ETFs have better long-term returns: the Vanguard Information Technology ETF, with a 20.1% annualized return over the last 10 years, and the Vanguard Consumer Discretionary ETF, up 18.3% over the same period.
Year to date through the end of April, the Vanguard Mega Cap Growth ETF is up 9%, and it has enjoyed a one-year return of 56% as of this writing. It also has a low expense ratio of 0.07%, which is well below the category average.
You could certainly make a case for owning any one of the Vanguard ETFs mentioned above, as they are all among the best in their class. But this ETF, which invests only in large stable companies, is built for the long run and is more diversified than the two high-performing sector funds.
The numbers don’t lie
If you invested $20,000 right now in this ETF and added $200 per month for the next 10 years, you’d have about $168,000 at a 16.9% return rate.
Say you’re around 45 years old, and you have a 20-year time horizon before you tap into your retirement fund. This ETF doesn’t have that long of a track record, but the index it tracks does. The CRSP US Mega Cap Growth Index has posted an annualized return of 9.1% since its inception in 2001. If you invested that same $20,000 now and contributed $200 per month, you’d have roughly $257,000 saved.
Now, let’s look at an even longer time horizon of 30 years. If you took the average annual return of the large-cap S&P 500 over that time, which is roughly 8.2%, you would have $542,000 with $200 monthly contributions.
And this ETF should only represent one portion of your retirement account, but even if you started now and invested for just the next 10 years, you have the potential to earn a sizable nest egg for your golden years. An ETF like this is such a great vehicle for retirement, because you enjoy access to the world’s largest and best companies but in a basket of stocks that you can set and forget.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Microsoft, and Vanguard Growth ETF. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon, long March 2023 $120.0 calls on Apple, short January 2022 $1940.0 calls on Amazon, and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.