MGK - MGK: A Solid ETF To Capitalize On Bull Run

2023-06-18 04:59:46 ET

Summary

• The upward trend in NASDAQ and S&P 500 index is expected to continue throughout the year, fueled by earnings growth, optimism about the Fed's pivot, and falling inflation.
• Vanguard S&P 500 Growth Index Fund ETF Shares (MGK) is a top pick to capitalize on the bull run, with a concentrated portfolio of mega-cap growth stocks from the communications, consumer cyclical, and technology sectors.
• MGK has outperformed its peers and has a strong buy rating, but investors should consider potential risks such as the Fed's monetary tightening and its impact on equity markets.

Despite NASDAQ and S&P 500's year-to-date gains of more than 30% and 18%, respectively, I anticipate the upward trend to continue throughout the rest of the year. Earnings growth, optimism about the Fed's pivot following one more hike, and falling inflation are all expected to fuel the rally in the second half of the year. Vanguard S&P 500 Growth Index Fund ETF Shares ( MGK ) appears to be one of the best ETFs to take advantage of bullish market conditions. Its concentrated portfolio of mega-cap growth stocks from the communications, consumer cyclical, and technology sectors gives it an edge over diversified growth portfolios in the current bull run.

The Bull Run is Likely to Extend Momentum

In late 2022, many analysts had predicted that stocks would hit a new low in the first half of 2023 due to the risk of a severe recession and a massive drop in earnings. However, due to better-than-expected economic data, investor confidence in equity markets began to return in early 2023, particularly in hard-hit mega and large-cap growth stocks. Indeed, the combination of strong job growth and falling inflation has fueled hopes for a Fed soft landing and a lower risk of a severe recession. Currently, investor confidence in equity markets reached an extreme greed level, owing to a pause in rate hikes after 10 consecutive increases. Higher investor confidence is generally indicative of greater upside potential. Another encouraging sign is that the Fed is likely to raise rates only once more in the second half of the year, followed by a rate cut beginning in early 2023. Furthermore, with inflation at two years low and unemployment at low levels , the risk of a severe recession and hard landing has significantly decreased. In general, low inflation and economic recovery are regarded as positive indicators for the stock market, particularly for growth stocks.

Earnings recovery has also begun quickly. The S&P 500 ended the first quarter with positive year-over-year earnings growth, defying initial expectations of a single-digit percentage decline. As the breadth of estimate revisions improves, Wall Street now expects positive earnings growth for the full year. According to FactSet data , S&P 500 earnings could grow at a rapid pace in the second half, with fourth-quarter growth reaching the high single-digit percentage. In Q4 2023, nine out of the eleven sectors are expected to post year-over-year earnings growth, but the sectors that are anticipated to contribute most to this growth are communication services (36.3%), consumer discretionary (21.3%), and information technology (12.4%). In Q4, Amazon.com ( AMZN ), Meta Platforms ( META ), and NVIDIA ( NVDA ) are expected to grow earnings by more than 100% year over year, while Microsoft ( MSFT ), Visa ( V ), and Mastercard ( MA ) are expected to see a double digits percentage growth. The earnings growth trend is expected to continue in 2024, with growth in communication services, consumer discretionary, and information technology expected to be in the high single-digit percentage.

Why MGK is the Best Pick to Capitalize on Bull Run?

Rather than investing in a single stock with multiple risks, investing in high beta growth ETFs with a significant concentration in mega-cap stock from tech, consumer cyclical, and communication sectors could be a good strategy to maximize gains while minimizing risk. A Vanguard Mega Cap Growth Index Fund ETF Shares is one such attractive option. Mega-cap growth stocks in the technology, consumer discretionary, and communication sectors account for roughly 76% of its overall portfolio.

Investing in mega-cap-focused ETFs like MGK appears appealing because mega-cap growth stocks have been the primary drivers of the big movements in the broader market index over the years. This trend extended in the first half of 2023 and is expected to continue for the rest of the year. Apple ( AAPL ), Alphabet ( GOOG ) ( GOOGL ), Amazon, and Microsoft, among other tech behemoths, have all seen their stock prices rise by more than 30% so far in 2023. Shares of NVIDIA and Meta have both increased by over 100% since the start of the year. The outperformance of mega stocks can be attributed to increased investor interest, as well as their ability to withstand volatility and generate solid earnings growth during the recovery period. Although mid-cap growth stocks also rose with broader markets, they did so slowly. As an illustration, shares of the Vanguard Mid-Cap Growth Index Fund ETF ( V OT) have increased 13% so far this year. Mid-and small-caps are vulnerable to broader market conditions and may take longer to capitalize on improved economic conditions.

Year to date, MGK shares are up around 36%, slightly outperforming closest peer Schwab U.S. Large-Cap Growth ETF ( SCHG ) and significantly beating Vanguard S&P 500 Growth Index Fund ETF Shares ( VOOG ). MGK's outperformance can be attributed to its focus on high beta large-cap stocks from the tech, communication, and consumer cyclical sectors. SCHG also appears to be a solid ETF to capitalize on the bull run due to its 46% portfolio concentration in the technology sector. However, its reliance on the healthcare industry and lower concentration on the consumer discretionary and communication sectors limit its ability to fully capitalize on the uptrend. VOOG, on the other hand, trails both SCHG and MGK due to its diversification across eleven industries and a lower emphasis on high beta mega caps from tech, communication, and consumer discretionary sectors.

Quant Rating

With a quant score of 4.50, MGK received a strong buy rating. Momentum and liquidity, two critical factors in analyzing future movement, are flashing strong buy signals. For example, the momentum factor received an A+ grade due to strong share price gains over the last three months. Momentum is a technical indicator used to measure the intensity at which share prices move in comparison to the market average. MGK's higher momentum score indicates that the ETF is poised to continue its upward trend. Meanwhile, a high liquidity score indicates increased investor interest, which bodes well for the price to maintain its momentum. A plus score on the expense ratio of 0.07% also makes MGK a solid ETF because expenses play a significant role in determining total returns, particularly over the long term.

Risk Factors to Consider

Although I expect the bull run to maintain its momentum in the second half, there are some risks to consider. The Fed's monetary tightening poses the greatest risk. If the Fed raises interest rates a couple of times in the second half, equity markets are likely to be volatile. This is because additional rate hikes could have a negative impact on the economy and worsen credit conditions . High interest may also shift investors' focus from risky assets to high-yielding money markets. Overall, the risk factor of a single stock may be higher, but the diversification provided by ETFs such as MGK may reduce that risk to some extent.

In Conclusion

During a bull market, it may be prudent to invest in high-beta ETFs such as Vanguard S&P 500 Growth Index Fund ETF Shares in order to outperform the market. MGK is well-positioned to fully capitalize on the bull run due to its focus on mega caps in the technology, communication, and consumer discretionary sectors. The earnings growth potential of mega caps from these high beta sectors also bodes well for significant price appreciation. Additionally, the low expense ratio and $1.24 annual dividend will increase total returns.

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