VBK: We'd Rather Own Large-Cap Growth ETFs Instead

Baris-Ozer

ETF Overview

Vanguard Small Cap Growth ETF (NYSEARCA:VBK) owns a portfolio of U.S. small-cap maturation stocks. VBK has delivered a full return of 404.2% since its inception successful 2004. Despite its awesome return, VBK has underperformed against its large-cap maturation peers. In addition, its fund value tends to driblet much sharply successful an economical downturn aliases erstwhile nan marketplace sentiment turned highly negative. Since 2023 is apt going to beryllium a twelvemonth of economical uncertainty, we deliberation investors should activity shelter successful large-cap maturation stocks instead.

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Fund Analysis

Small-Cap Growth Stocks lagged down Large-Cap Growth Stocks successful nan agelong term

Growth stocks are stocks that mostly person agelong runways of growth. Growth stocks thin to waste and acquisition astatine lofty valuations arsenic investors are much consenting to salary a hefty premium for nan early maturation of these companies.

Given long runways of growth, maturation stocks, whether belonging to small-cap aliases large-cap categories, should nutrient beardown returns. This is so true. However, Small-cap maturation costs specified arsenic VBK's full return was much inferior than large-cap maturation costs specified arsenic Vanguard Russell 1000 Growth ETF (VONG) and Vanguard S&P 500 Growth ETF (VOOG). As nan floor plan beneath illustrates, VBK delivered a full return of 151.3% successful nan past decade. While this was impressive, it was measurement down VONG's 290.8% and VOOG's 260.4%.

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One whitethorn wonderment why small-cap maturation costs underperformed against their large-cap maturation peers. The reality is that small-cap maturation stocks whitethorn person beardown maturation profiles, but they are not arsenic established arsenic large-cap maturation stocks. The moat they person are not arsenic beardown arsenic large-cap stocks. Hence, they are much susceptible erstwhile facing macroeconomic headwinds. On nan different hand, large-cap maturation stocks thin to beryllium well-established and moaty. They besides thin to make beardown rate flows. Therefore, they person nan rate to put to turn and possibly moreover return this rate backmost to shareholders done some buybacks and dividends.

What happens if an economical downturn takes place?

In an economical downturn, small-cap maturation stocks are besides much susceptible than large-cap stocks. Not only because their moats are not arsenic beardown arsenic its large-cap maturation peers, but their rate positions are besides not arsenic beardown arsenic their large-cap peers. In addition, a batch of small-cap maturation stocks are newer aliases start-ups. They person yet to go profitable. In bid to grow their businesses, they request to raise their rate done equity offerings. However, successful an economical downturn, investors mostly do not person nan appetite to put successful companies that are little profitable aliases not moreover profitable. Therefore, they whitethorn tally into liquidity problems.

The consequence is evident successful VBK's money value versus its large-cap maturation peers. As tin beryllium seen from nan floor plan below, during nan Great Recession successful 2008/2009 and nan pandemic successful 2020, VBK suffered much nonaccomplishment successful its stock value than different large-cap maturation costs specified arsenic VONG and VOOG. In addition, erstwhile nan marketplace sentiment is negative, specified arsenic nan years 2016, 2019 and past year, nan grade of diminution of VBK is greater than its large-cap maturation peers.

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Uncertainty successful 2023 tin beryllium a headwind for VBK

While galore group person expected that nan fierce complaint hikes past twelvemonth by nan Federal Reserve will soon extremity nan system to a recession successful 2023, this has yet to happen. On nan different hand, ostentation appears to beryllium sticky. While ostentation had intelligibly peaked successful mid-2022, nan halfway CPI yearly maturation complaint excluding rent, food, and power stayed astatine 4.1% successful nan past 3 months. In addition, nan occupation marketplace added 517 1000 jobs successful January. Moreover, yesterday's unit income information successful January showed signs of spot arsenic unit income grew by 3%. This intends that nan Federal Reserve still has much activity to do to cool nan system and to conflict against inflation. Hence, we expect rates to spell higher this year, albeit astatine a slower gait than past year.

Given higher rates owed to inflation, VBK's valuation will apt beryllium depressed. In addition, an net recession whitethorn proceed arsenic nan system yet heads for a difficult landing. Given nan greater magnitude of diminution for VBK than its peers successful an economical downturn, we deliberation it is amended to enactment distant from VBK.

Investor Takeaway

VBK's small-cap maturation portfolio whitethorn proceed to bring affirmative returns successful nan agelong term. However, our study shows that large-cap maturation stocks connection moreover amended returns. In addition, large-cap maturation stocks besides usually connection amended downside protection successful a imaginable economical downturn. Therefore, we urge investors enactment distant from VBK and to attraction connected large-cap maturation stocks instead.

Additional Disclosure: This is not financial proposal and that each financial investments transportation risks. Investors are expected to activity financial proposal from professionals earlier making immoderate investment.

I americium a worth focused investor. Stocks emergence and autumn for galore different reasons that we often cannot predict. Eventually, it is those companies pinch a wide moat and nan expertise to make rate travel that prevail. Therefore, my finance attraction is to find worth stocks that are capable to make rate flow, pinch sustainable dividends and supply maturation complete time. I attraction my attraction connected analyzing large-capped dividend maturation stocks, REITs and ETFs. I purpose astatine providing a quarterly update and insights connected stocks I follow. Please consciousness free to browse nan articles that I wrote and supply immoderate comments.