Unlocking Wealth: My Top Pick for a Vanguard Growth Fund in My Roth IRA
November 29, 2024
0 4 minutes read
Are you ready to supercharge your retirement savings? A Roth IRA is your best friend when it comes to growth investing. With tax-free withdrawals during retirement, holding aggressive growth assets in a Roth can unlock the full potential of long-term capital gains. That’s why I’m all in on the Vanguard S&P 500 Growth ETF(NYSEMKT: VOOG)—it’s the cornerstone of my retirement game plan.
Let’s dive into why this fund should be at the top of your list as a Roth IRA anchor holding and how it stacks up against Warren Buffett’s favored S&P 500 index fund.
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The Vanguard S&P 500 Growth ETF has been nothing short of stellar, boasting a remarkable 34.54% return from January 1 to November 26, 2024—outperforming the broader S&P 500, which saw a 27.66% increase, factoring in distributions and reinvestment. This incredible performance comes from a keen focus on 234 companies within the S&P 500 that are all about growth, carefully chosen for their earnings expansion and momentum.
With nearly 50% of its portfolio dedicated to information technology, this fund captures the essence of the digital revolution. Industry titans like Apple, Nvidia, and Microsoft are at the forefront, continually pushing innovation and leading the market, laying a robust foundation for future growth.
Despite its aggressive growth strategy, rest assured that this fund maintains impressive metrics—boasting a 39.7% return on equity and a 25.2% earnings growth rate. This combination of profitability and growth potential helps justify its higher price-to-earnings ratio of 35, compared to the S&P 500’s 26.9.
Now, let’s talk about Warren Buffett’s advice, which leans towards a simpler strategy: putting 90% of retirement savings into a cost-effective S&P 500 fund like the Vanguard S&P 500 ETF(NYSEMKT: VOO). This approach provides extensive market exposure with an ultra-low 0.03% expense ratio.
While the Vanguard S&P 500 ETF certainly offers great diversification with 504 stocks, its mix of growth and value companies has historically lagged behind the growth-focused fund during booming market cycles. However, this comes with reduced volatility and deeper sector diversification.
When it comes to investment fees, every penny counts—they directly eat into your returns. The Vanguard S&P 500 Growth ETF has an annual expense ratio of just 0.10%. That means a $10,000 investment will cost you only $10 in fees each year, while the Vanguard S&P 500 ETF charges a mere $3 annually on the same investment.
While that $7 difference may seem negligible, it compounds over time alongside your investment returns. If the growth fund continues to deliver higher returns, it could outpace that slight fee difference significantly. Both funds are among the most cost-efficient in their respective categories, with the industry average fees being nearly 10 times higher.
However, the Vanguard S&P 500 Growth ETF does come with a trade-off—its concentrated exposure leads to increased volatility. With a beta of 1.11, it tends to magnify market movements significantly—when the broader market rises by 10%, this fund typically rises by about 11.1%, but it also sees sharper declines during downturns. For those long-term Roth IRA investors, this short-term volatility might be a worthy exchange for greater growth potential.
Both funds share a substantial overlap in their top holdings, often moving in sync. The real difference lies in the growth fund’s concentrated focus on companies with stronger growth characteristics. Since inception, the Vanguard S&P 500 Growth ETF has significantly outperformed the Vanguard S&P 500 ETF.
A Roth IRA isn’t just a retirement account; it’s a powerful tool for aggressive growth investing. With tax-free withdrawals in retirement, investing in growth-focused funds can lead to significantly larger after-tax wealth over decades of compounding.
For those who are patient and can ride the volatility, the Vanguard S&P 500 Growth ETF presents a prime opportunity to maximize the tax-free growth benefits within a Roth IRA. Sure, it might dip more sharply in market corrections, but its focus on high-quality growth companies sets the stage for long-term wealth accumulation.
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George Budwell holds positions in Apple, Microsoft, Nvidia, Vanguard Admiral Funds-Vanguard S&P 500 Growth ETF, and Vanguard S&P 500 ETF. The organization has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. They also recommend the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. Please refer to their disclosure policy for more information.
