The Motley Fool: The Vanguard Growth ETF

Many of us would love to have gobs of growth stocks in our portfolios, but it takes some skill and time to study the universe of stocks to determine which companies seem most promising. So consider simply investing in an exchange-traded fund (ETF) that’s focused on companies growing faster than average. (An ETF is a fund that trades like a stock, making it easy to get into and out of.)

A fine example is the Vanguard Growth ETF (VUG). The past 15 years have featured higher than-average growth rates for the overall market, with the S&P 500 averaging 14.2% per year (as of Dec. 5). Over the same period, the Vanguard Growth ETF averaged 16.2% annually.

The fund’s expense ratio (annual fee) is just 0.04%, meaning you’ll be charged only $4 per year for every $10,000 you have invested in it.

As of the end of October, the ETF owned 160 different stocks. Its top holdings were Nvidia, Apple, Microsoft, Amazon.com, Broadcom, Google parent Alphabet, Tesla, Facebook parent Meta Platforms and Eli Lilly. Much of the fund’s assets are in these leading tech-heavy stocks, especially the top three, so be sure you’re bullish on their futures if you decide to invest. Also be aware that if and when the market pulls back, so will the ETF – though it has always bounced back after such drops. (The Motley Fool owns shares of and recommends the Vanguard Growth ETF.)

Ask the fool

Q. Is it smart to focus only on stocks with high dividend yields and low price-to-earnings (P/E) ratios? – T.P., Youngsville, Louisiana

A. Not necessarily. Some dividend yields are steep simply because the stock price has fallen – perhaps due to troubles at the company. After all, a dividend yield is the result of dividing the annual dividend amount by the current stock price, so a lower share price will result in a higher yield. Yields of, say, 2% to 4% (or even more) can be solid, especially if the payout has been growing well, but dig deeper into any company sporting an outsized dividend yield. Remember, too, that a fast-growing 2% dividend yield can be preferable to a slow-growing 3% yield.

Meanwhile, plenty of great and growing companies don’t pay dividends, so don’t exclude nonpayers, unless you’re really looking for income. (Current nondividendpayers include Amazon.com, Netflix, Tesla and Ulta Beauty.)

Also, while a low P/E ratio suggests a better value than a high one, remember that P/E ratios vary by company and industry. And promising companies not yet turning a profit won’t have P/E figures at all (since you can’t divide by zero).

Compare a company’s recent P/E with its own five-year average to see if it’s now relatively high or low. Compare it with peers in its industry, too. You can research companies and assess many other valuation measures at sites such as Fool.com and finance.yahoo.com.

Q. When a stock is said to be up $1.65 or down $4.22, from what price has it risen or fallen? – F.S., Westwood, New Jersey

A. The gain or loss is generally measured from where the stock traded at the end of the last trading session.

My smartest investment

My smartest investment? Well, in the mid-1950s, when I was a teenager mowing lawns in a wealthy suburb of Chicago, my father recommended investing the money I’d saved. He suggested I invest in a company called Hertz that specialized in car rentals, as he thought that more and more Americans would want to rent cars. I took my father’s advice. The main negative in doing so was that by the time I got to college in the late 1950s, I expected all stocks to triple their value or more every year!

Fortunately, I was also invested in the Greyhound bus company with $100 from my grandfather. (My parents made that choice, reasoning that people would always need to ride buses.) So watching Greyhound slowly grow in the 1950s did give me a reality check for my Hertz stock. – P.R., San Jose, California

The Fool Responds: You were fortunate indeed to own shares of a fast-growing company – and also to realize that skyrocketing growth is not the norm. This is why it’s smart to spread your dollars across a bunch of companies. Hertz now includes the Dollar, Thrifty and Firefly car-rental chains. Greyhound ended up filing for bankruptcy and is now owned by the German travel company Flix.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)