Is The Price You Pay For Vanguard’s VUG Justified?

The fund trades at a discount to its own recent past, but what you get in earnings doesn’t yet clear the risk-free hurdle.

The companies inside the Vanguard Growth ETF (VUG) offer an aggregate earnings yield of 3.0%, while a 10-year US Treasury offers 4.4%. That simple math frames the central question for any potential owner: Is the price you are asked to pay for this basket of growth stocks a sensible one, given what is actually inside?

When you buy an index fund, you are buying a slice of the market at the going rate. The question is whether that rate is fair. Let’s look at the fund not against the whole market, but against itself.

A Price Tag Below Its Own Average

On the surface, VUG looks cheaper than it has been recently. The fund’s trailing price-to-earnings ratio is 33.7. Over the last five years, that same multiple has averaged 37.0. Today’s price is about 9% below that 5-year average. A discount is often a good starting point, but it only matters if the businesses you are buying are holding up their end of the bargain. A low price for deteriorating assets is no bargain at all.

The Engine Powering The Price

Here, the story gets more interesting. The earnings for the companies that dominate this fund have been anything but weak. Across the fund’s largest holdings, earnings per share grew about 57% over the past year. This isn’t a broadly distributed fund; its five largest holdings make up 45.5% of its assets. The performance of giants like Nvidia (NVDA) at 13.1%, Apple (AAPL) at 12.3%, and Microsoft (MSFT) at 9.0% is, for all practical purposes, the fund’s performance.

Wall Street analysts expect that strength to continue. The fund’s forward price-to-earnings ratio, based on profit estimates for the next year, is a much lower 26.7. The only way a P/E can fall that much is if earnings are expected to rise significantly. In this case, consensus estimates imply the holdings will grow their aggregate adjusted earnings by about 20% over the coming year.

The Alternative You Can’t Ignore

So, you have a fund trading below its recent valuation average, powered by companies with strong demonstrated and expected growth. What’s the catch? It comes down to opportunity cost. The fund’s 3.0% earnings yield sits about 1.4 percentage points below the 4.4% you could earn on a U.S. Treasury bond, which carries essentially zero risk. This is what is known as a negative risk premium. You are paying a price so high that you are not being compensated, in terms of current earnings, for taking on the risks of owning stocks.

For an owner of VUG, the decision rests on this tension. The valuation, judged against its own history and the growth of its key holdings, appears reasonable. But the immediate yield is less than what you can get from the government. Buying an index means you accept every holding at the price the market sets. The key thing to watch is whether that 20% forward earnings growth materializes. If it does, today’s price may look justified in hindsight. If it falters, the appeal of that risk-free 4.4% will only grow stronger.

How Do You Choose Among Nearly 200 ETFs?

VUG looks cheap against its own history, and it may not be the only fund that does. Owning an ETF is one of the simplest ways to buy a whole market, sector, or theme in a single ticker, and that is a genuinely sensible way to invest. The hard part is not whether to use ETFs; it is which one: close to two hundred equity ETFs compete for the same dollar, and two funds promising nearly the same exposure can carry very different price tags for what is inside them. Our ETF Valuation and Performance Scorecard ranks the whole equity universe on exactly this test, from risk-adjusted return down to how each fund’s price compares with its own history, so the genuine values separate from the funds quietly paying up. And if you would rather not sort through it at all, the Trefis High Quality (HQ) Portfolio takes the systematic route a level deeper than any index: 30 individually screened names, rules-based and re-balanced, with a record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.