The S&P 500 has advanced 23% year to date amid soaring interest in artificial intelligence (AI) stocks. Nvidia alone has been responsible for one-quarter of that upside, and the “Magnificent Seven” stocks have collectively accounted for half of the gains in the index. The members of that elite group (and their year-to-date returns) are listed alphabetically below.

  • Alphabet: 18%
  • Amazon: 25%
  • Apple: 23%
  • Meta Platforms: 64%
  • Microsoft: 14%
  • Nvidia: 190%
  • Tesla: (12%)

Investors can get heavy exposure to the Magnificent Seven stocks through the Vanguard Mega Cap Growth ETF (MGK). But the fund provides additionally diversity, which has allowed it to outperform five members of the Magnificent Seven (and the S&P 500) in 2024 with a year-to-date return of 27%.

History says the Vanguard Mega Cap Growth ETF could turn an investment of $500 per month into $500,000 over two decades. Here’s what investors should know.

The Vanguard Mega Cap ETF provides heavy exposure to the Magnificent Seven stocks
The Vanguard Mega Cap Growth ETF tracks the performance of 71 U.S. companies, best classified as large-cap growth stocks. The fund is heavily weighted toward the technology sector and covers 70% of domestic equities by market value. This provides diversified exposure to some of the most influential companies in the world.

The 10 largest holdings in the Vanguard Mega Cap Growth ETF are listed by weight below:

  1. Apple: 13.7%
  2. Microsoft: 13.1%
  3. Nvidia: 11.4%
  4. Amazon: 6.8%
  5. Alphabet: 4.9%
  6. Meta Platforms: 4.9%
  7. Eli Lilly: 3.4%
  8. Tesla: 3.2%
  9. Visa: 2.1%
  10. Mastercard: 1.9%

As detailed above, the Vanguard Mega Cap Growth ETF has 58% of its assets allocated to the Magnificent Seven stocks. That concentration makes the index fund a risky investment because it often leads to volatility, but volatility cuts both ways.

The Magnificent Seven are highly profitable companies that account for a large percentage of earnings across the S&P 500. For instance, analysts expect the S&P 500 companies, in aggregate, to report 3.4% earnings growth in the third quarter, but that figure drops to 0.1% if the Magnificent Seven are excluded, according to FactSet Research.

Consequently, the concentrated nature of the Vanguard Mega Cap Growth ETF and the associated volatility has historically been a positive thing for shareholders. The index fund has consistently beaten the S&P 500 over long periods due to its heavy exposure to the Magnificent Seven. And that outperformance could continue as artificial intelligence becomes a material source of profit for technology stocks.

That is especially true for the Magnificent Seven. Every member of that elite group stands to benefit from the AI boom. Meta Platforms is using AI to make social media more engaging. The upcoming launch of Apple Intelligence could spur an iPhone upgrade cycle.

Amazon, Microsoft, and Alphabet are the largest public clouds in the world. Nvidia is the leader in AI accelerators, and Tesla aims to build autonomous vehicles.

Rolled dollar bills arranged in an upward trending bar chart.
Image source: Getty Images.

The Vanguard Mega Cap Growth ETF could turn $500 per month into $500,000
The Vanguard Mega Cap Growth ETF advanced 867% over the last 15 years, compounding at 16.3% annually. Investors may dismiss those gains as being driven by the recovery from the Great Recession. But the index fund’s strong performance over the last 15 years was not due to the market being depressed in 2009.

I say that because the Vanguard Mega Cap Growth ETF has actually produced more robust returns in recent years. For instance, the index fund has gained 16.9% annually over the last decade, 20.7% annually over the last five years, and 46% over the last 12 months.

I’ll assume an annual return of 13.3% (which is at least 3 percentage points smaller than any of the figures given above) to introduce a margin of safety. At that rate, $500 invested monthly would be worth $112,000 in 10 years, $503,000 in 20 years, and $1.8 million in 30 years.

Importantly, the Vanguard Mega Cap Growth ETF trades at 37.5 times earnings, a material premium to the S&P 500, which trades at 27.4 times earnings. But the companies comprising the Vanguard ETF are forecast to grow earnings at 18% annually over the long term, which makes the present valuation seem tolerable. Also noteworthy, the index fund has a below-average expense ratio of 0.07%, meaning the annual fees will total $0.70 for every $1,000 invested in the fund.

Here’s the bottom line: The Vanguard Mega Cap Growth ETF provides diversified exposure to some of the most influential growth stocks in the world. It has consistently outperformed the S&P 500, and that trend could continue as technology companies lean into growing demand for artificial intelligence. Finally, even if the index fund fails to match its robust returns in the past, it could still turn $500 per month into $500,000 over the next two decades.

— Trevor Jennewine

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Source: The Motley Fool