Index mutual funds have been steadily growing in popularity over the years, as investors favor the low-cost and good returns that these passively managed mutual funds have produced. Last year, according to Morningstar, passive funds surpassed active funds in assets and continue to see strong inflows.
With the growth of passive assets, there has been an explosion of index funds and exchange-traded funds (ETFs) on the market that track all the major indexes and various segments within each of them.
When comparing index funds that track the same index, there's not going to be a huge difference in performance, but there is more deviation between index funds that track different indexes. Within the large-cap growth segment, which has consistently beaten the major broad benchmarks over the long term, there are two leading funds that track different indexes -- the Vanguard Growth Index Fund (VIGAX -0.18%) and the USAA Nasdaq-100 Index Fund (USNQX -0.55%).
Which is the better investment?
Image source: Getty Images.
Vanguard Growth Index Fund: Stellar returns with minimal fees
The Vanguard Growth Index Fund is one of the largest funds in its class, with about $46.1 billion in assets under management. It tracks the CRSP U.S. Large Cap Growth Index, which includes about 269 large-cap growth stocks with a median market cap of $213 billion. Its 10 largest holdings are Apple, Microsoft, Amazon, Alphabet, Facebook, Visa, Home Depot, Mastercard, NVIDIA, and PayPal, and they make up around 46% of the portfolio. Furthermore, around 44% of the fund consists of stocks in the technology sector, followed by consumer services (19.5%), financial (11.1%), industrials (10.2%), and healthcare (8%) -- with the same weightings as the index.
As for returns, Vanguard Growth Index Fund has a one-year return of 45.3%, a three-year annualized return of 23.4%, a five-year annualized return of 19.7%, and a 10-year annualized return of 18.5%, through Aug. 31. Since its inception in 2000, it has an annualized return of 8.1%. It also has an annual expense ratio of 0.05%.
The fund has an average price-to-earnings (P/E) ratio of 38.8%, an average return on equity of 21.1%, and an earnings growth rate of 20.9%.
USAA Nasdaq-100 Index Fund: Riding the technology wave
The USAA Nasdaq-100 Index Fund is a growth index fund, like its Vanguard counterpart, but there are key differences. The most notable is that this fund, with $3 billion in assets, tracks a different index, the Nasdaq 100. The Nasdaq 100 tracks the 100 largest non-financial stocks that trade on the Nasdaq Index.
In comparison to the Vanguard fund, it is far more concentrated. About 55% of the portfolio is made up of the top 10 holdings, which include Apple, Amazon, Microsoft, Facebook, Alphabet (A and C shares), Tesla, NVIDIA, PayPal, and Netflix. The sector weightings are heavily tech-oriented with about 60% in tech names, including 13.3% in retail-Internet, 13.2% in technology hardware storage, 11.7% in interactive media and services, 11.1% in systems software, and 10.2% in semiconductors.
Consumer services is the next largest sector at about 21%, followed by healthcare (7%), consumer goods (6.6%), and industrials (5.3%).
Launched in 2000, the USAA Nasdaq-100 Index Fund has posted stellar returns in the past year. Year-to-date as of Sept. 8 it's up about 33%. For the one-year period ended Aug. 31, the fund is up 58.4%. It has a three-year annualized return of 27.2%, a five-year annualized return of 23.9%, and a 10-year annualized return of 21.9%. Since its inception in 2000, it has a 7.2% annual return. The annual expense ratio is 0.48%.
Which is the better buy?
These two funds are an interesting comparison because they invest in two different parts of the large-cap growth universe and were launched in the same year. The USAA Nasdaq-100 Index Fund has the better returns over the last 10 years, and currently. It has tapped into the technology sector, which has driven the overall bull market we've seen over the past decade. Longer-term, going back 20 years, the more diversified Vanguard fund has had better returns, more adeptly navigating the tech bust of the early 2000s and the Great Recession. It also has a significantly lower expense ratio.
Which of these index funds you choose to invest in depends on your risk tolerance. While both are obviously growth funds, the USAA fund has more risk as it is more concentrated in the technology sector. The short-term volatility of the tech sector was on display in the past month or so as the fund surged about 11% in August, but then the sector has dropped back about 6% so far in September.
If you have a higher level of risk tolerance, this is a good investment for you. Short-term volatility is just that, short-term. Long-term, the technology sector will likely continue to drive the market in this decade and produce strong returns for this fund.
If you want more diversification, while maintaining growth, the Vanguard fund might be the better choice. The fund has a lower beta and standard deviation, which are two measures of risk, and it has lower fees and comparable returns that prove to be even better the longer you pull back the lens.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, 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 Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Home Depot, Mastercard, Microsoft, Netflix, NVIDIA, PayPal Holdings, Tesla, and Visa and recommends the following options: long January 2022 $1920 calls on Amazon, long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.
I am an expert and enthusiast-based assistant. I have access to a wide range of information and can provide assistance on various topics. I can help answer questions, provide insights, and engage in detailed discussions.
Regarding the article you mentioned about index mutual funds, I can provide information related to index funds, passively managed mutual funds, the Vanguard Growth Index Fund, and the USAA Nasdaq-100 Index Fund. Let's dive into the details!
Index Mutual Funds and Passively Managed Mutual Funds
Index mutual funds are investment funds that aim to replicate the performance of a specific market index, such as the S&P 500 or the Nasdaq 100. These funds are passively managed, meaning they do not rely on active stock picking or market timing. Instead, they hold a diversified portfolio of securities that mirrors the composition of the chosen index.
Passively managed mutual funds, including index funds, have gained popularity among investors due to their low costs and historically good returns. These funds have seen strong inflows and have surpassed active funds in terms of assets.
Vanguard Growth Index Fund
The Vanguard Growth Index Fund is one of the largest funds in its class, with approximately $46.1 billion in assets under management. It tracks the CRSP U.S. Large Cap Growth Index, which consists of around 269 large-cap growth stocks. The fund's top holdings include Apple, Microsoft, Amazon, Alphabet, Facebook, Visa, Home Depot, Mastercard, NVIDIA, and PayPal, which make up around 46% of the portfolio. The technology sector represents about 44% of the fund, followed by consumer services, financials, industrials, and healthcare.
In terms of returns, the Vanguard Growth Index Fund has shown strong performance. As of August 31, it had a one-year return of 45.3%, a three-year annualized return of 23.4%, a five-year annualized return of 19.7%, and a ten-year annualized return of 18.5%. Since its inception in 2000, it has had an annualized return of 8.1%. The fund also has a low expense ratio of 0.05%.
USAA Nasdaq-100 Index Fund
The USAA Nasdaq-100 Index Fund is also a growth index fund, but it tracks a different index, the Nasdaq 100. This index includes the 100 largest non-financial stocks that trade on the Nasdaq Exchange. The fund has approximately $3 billion in assets and is more concentrated than the Vanguard fund. The top 10 holdings, including Apple, Amazon, Microsoft, Facebook, Alphabet, Tesla, NVIDIA, PayPal, and Netflix, make up about 55% of the portfolio. The fund has a significant allocation to the technology sector, with around 60% invested in tech names. Other sectors represented in the fund include consumer services, healthcare, consumer goods, and industrials.
The USAA Nasdaq-100 Index Fund has shown strong returns as well. As of August 31, it had a one-year return of 58.4%, a three-year annualized return of 27.2%, a five-year annualized return of 23.9%, and a ten-year annualized return of 21.9%. Since its inception in 2000, it has had a 7.2% annual return. The fund has an expense ratio of 0.48%.
Which Fund is Better?
The choice between the Vanguard Growth Index Fund and the USAA Nasdaq-100 Index Fund depends on your risk tolerance and investment preferences.
The USAA fund has performed better over the last ten years and currently, benefiting from its focus on the technology sector, which has been a driving force in the market. However, it is more concentrated and carries more risk, especially considering the short-term volatility that the technology sector can experience.
On the other hand, the Vanguard fund offers more diversification and has a longer track record of navigating market downturns. It also has a significantly lower expense ratio, which can be advantageous for long-term investors.
Ultimately, the decision should align with your risk tolerance and investment goals. If you prefer more diversification and a lower expense ratio, the Vanguard Growth Index Fund might be a better choice. If you have a higher risk tolerance and believe in the long-term potential of the technology sector, the USAA Nasdaq-100 Index Fund could be a suitable option.
Please note that investing involves risks, and it is important to conduct thorough research and consider your individual financial situation before making any investment decisions.
Let me know if there's anything else I can assist you with!
