A compelling U.S. mid-cap growth ETF

This fund's low-fee, turnover-conscious approach to portfolio construction, and its broad diversification, should serve investors well.

Alex Bryan 17 April, 2018 | 5:00PM

While most mid-cap growth stocks don't attract as much attention as their larger counterparts, they tend to offer greater growth potential, with a little less risk than small caps. Among the U.S.-traded ETFs that invest in this segment,   Vanguard Mid-Cap Growth ETF (VOT) is one of the most compelling because it is one of the cheapest. On top of its considerable cost advantage, the fund effectively diversifies risk and applies generous buffering rules to mitigate unnecessary turnover. It earns a Morningstar Analyst Rating of Silver.

The fund employs full replication to track the CRSP U.S. Mid Cap Growth Index, which targets stocks representing the faster-growing and more richly valued half of the U.S. mid-cap market and weights them by market capitalization. These firms have attractive outlooks, but there is always a risk that they won't live up to the market's expectations. Many of the fund's holdings have not yet established sustainable competitive advantages and may not hold up as well as large caps during market downturns.

Because it casts a wide net, this portfolio includes some stocks with only modest growth traits. These holdings should help reduce volatility by limiting exposure to the most-speculative stocks. Despite its broad reach, the fund has less overlap with its value counterpart,  Vanguard Mid-Cap Value ETF (VOE), than do rival value and growth funds based on the Russell Midcap and S&P MidCap 400 indexes. Its benchmark also applies more-generous buffer rules to mitigate turnover.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

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