VOT - VOT: A Laggard That Can Relatively Outperform Large-Caps

2023-12-05 10:25:14 ET

Summary

• Mid-cap growth has underperformed large-caps, but mean reversion may lead to a rotation into mid-cap growth.
• The Vanguard Mid-Cap Growth ETF is a good fund to consider, with low expenses and a diverse portfolio.
• VOT compares favorably to other ETFs in the mid-cap growth segment, making it a solid contender for investment.

For all the screaming around this being a bull market, mid-cap growth didn't get the memo.

Large-caps way outperformed everything this year, but I doubt that continues. Mean reversion at some point kicks in, which is why the Vanguard Mid-Cap Growth ETF ( VOT ) may be a good fund to rotate into out of the S&P 500 or NASDAQ. It's a good fund and I think it's worth considering.

VOT is an exchange-traded fund that follows a passive management strategy and strives to mirror the performance of the CRSP US Mid Cap Growth Index. Vanguard, the sponsor of this ETF, launched it on August 17, 2006. With over $19 billion in assets, it ranks as one of the most substantial ETFs in the Mid Cap Growth segment of the US equity market. The fund's annual operating expenses are a meager 0.07%, making it one of the most cost-effective options in the space.

Scrutinizing the ETF Holdings

VOT has a diverse portfolio spread across various sectors. However, its heaviest allocation is towards the Information Technology sector, which accounts for about 23% of the portfolio. Industrials and Healthcare are the other two sectors which make up a significant portion of the ETF.

The fund is largely evenly weighted, with no holding making up more than 1.7% of the portfolio currently. Some of the top holdings despite lower weightings include:

• Amphenol Corp. ( APH ) - a renowned manufacturer of electronic and fiber optic connectors, cable, and interconnect systems.
• Microchip Technology ( MCHP ) - a premier supplier of microcontroller, mixed-signal, analog, and Flash-IP solutions.
• DexCom Inc. ( DXCM ) - a business specializing in the creation, advancement, and marketing of continuous glucose monitoring systems.
• Motorola Solutions Inc. ( MSI ) - offers communication infrastructure, devices, accessories, software, and services.
• TransDigm Group Inc. ( TDG ) - a top-tier global designer, producer, and distributor of highly engineered aircraft components.

Peer Comparison

When compared to other ETFs in the Mid Cap Growth segment, VOT holds its ground quite well. For example, both the iShares S&P Mid-Cap 400 Growth ETF ( IJK ) and the iShares Russell Mid-Cap Growth ETF ( IWP ) aim to mirror the performance of a comparable index. While IJK has $7.64 billion in assets and an expense ratio of 0.17%, IWP has $13 billion and charges 0.23%. In comparison, VOT's lower expense ratio and significant asset size make it a solid contender.

Pros and Cons of the Mid-Cap Growth Theme

Allocating funds to mid-cap growth equities carries its own assortment of advantages and disadvantages. On the upside, mid-cap enterprises frequently exhibit superior growth potential in comparison to large-cap entities and are usually less hazardous relative to their small-cap equivalents. This positions them as an attractive mix of steadiness and prospective growth. Moreover, growth stocks are typically accompanied by a higher degree of volatility, making them more likely to run in a *true* bull market. Conversely, growth stocks tend to have loftier valuations and above-average sales and earnings growth rates. If we have a recession, mid-cap or not, growth gets hammered most likely.

Conclusion: Is VOT a Worthy Investment?

I like this segment of markets broadly on a relative basis, and VOT is a good fund. It features a low expense ratio, diversification across sectors, and a substantial asset base. If you're bullish on mean reversion, mid-caps are likely to play catch up to large-caps in the next year. Just be aware that any kind of recession would still likely cause losses here.

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