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Earlier this year, theVanguard S&P 500 ETF became the first exchange-traded fund (ETF) to surpass $1 trillion in assets. The ETF has grown in size thanks to its simplicity. It tracks theS&P 500index and charges a mere 0.03% expense ratio, or $0.30 per $1,000 invested. Many brokerages allow users to invest in fractional shares of the ETF.
With low fees and the ability to invest a customized dollar amount in the ETF rather than full-share increments, the Vanguard S&P 500 ETF has become a popular choice for getting diversified exposure to the U.S. stock market.
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However, if given $1,000 to invest in any ETF in August, I’d choose the Vanguard Communication Services ETF (NYSEMKT: VOX) with its slightly higher 0.09% expense ratio, instead of the Vanguard S&P 500 ETF. Here’s why.
Customizing ETF holdings with investment objectives
The Vanguard S&P 500 ETF hit a new all-time closing high on Aug. 7, finishing the session at $710.71 per share. A staggering 38% of the ETF is invested in tech stocks. And despite owning over 500 components, just 25 of them account for over half of the ETF.
The S&P 500 is now a growth-stock-focused index, and it’s not as well diversified in dividend and value stocks as it used to be. So some investors may prefer to simply buy their favorite growth stocks and support those holdings with value- and income-focused ETFs. Or conversely, buy the Vanguard Morningstar Growth ETF or Vanguard Morningstar Mega Cap Growth ETF and support those holdings with individual, dividend-paying value stocks.
A sector with high growth potential at an inexpensive valuation
What makes the Vanguard Communication Services ETF unique is its heavy concentration in a handful of growth stocks. Alphabetand Meta Platforms make up 42.5% of the ETF. Throw in Walt Disney and Netflix, and that’s over half the ETF in just four stocks.
Even with high-profile growth stocks like Alphabet and Meta Platforms, the ETF is chock-full of dividend-paying value stocks. Legacy media companies, such as Comcast, and telecommunications companies like Verizon Communications and AT&T tend to sport inexpensive valuations and high yields.
The Vanguard Communication Services ETF bets big on a few key growth stocks, but its supporting cast is mostly stodgy value stocks, whereas the Vanguard S&P 500 ETF is heavily concentrated in many megacap and large-cap growth stocks. That’s why the Vanguard Communication Services ETF has a dirt cheap 17.1 price-to-earnings (P/E) ratio as of June 30 compared to a 27.5 P/E for the Vanguard S&P 500 ETF. Communications is the second-cheapest sector by P/E ratio, just ahead of financials, which may come as a surprise, given that so much of the sector’s weighing is in hyperscalers Alphabet and Meta Platforms.
