MGK: A Mega-Cap ETF Suitable Only For Long-Term Growth Seeking Investors (NYSEARCA:MGK)

Vanguard Mega Cap Growth ETF (NYSEARCA:MGK) Is highly invested in mega-cap most sought-after stocks in the technology sector. Almost 60 percent of its entire fund is invested in technology companies, that also includes Amazon Inc. (AMZN). Over the years, the fund has historically generated a price growth in excess of 15 percent. However, this ETF has quite a low yield, and off late has come down to around 0.5 percent. So, the fund is suitable only for growth seeking investors. Unfortunately, 2022 has been bad for this fund, as it generated a negative total return of 21 percent.

Vanguard Mega Cap Growth ETF

Vanguard Mega Cap Growth ETF is an exchange traded fund (ETF) that invests in stocks of mega-cap companies, and fully replicates the performance of the CRSP US Mega Cap Growth Index. It has invested almost 60 percent of its entire fund in technology companies. Another 18 percent is invested in consumer discretionary giants like Tesla Inc. (TSLA), Home Depot Inc. (HD), McDonald’s Corp. (MCD), NIKE Inc. (NKE), Starbucks Corp. (SBUX), etc. 15 percent of the fund is invested in various companies from the healthcare and industrial sector.

CRSP US Mega Cap Growth Index is a float-adjusted, market-capitalization weighted index designed to measure the equity market performance of mega-cap growth stocks in the United States. Vanguard Mega Cap Growth ETF allocates its entire fund in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. There had been a consistent price growth of more than 15 percent over the past 10 years, barring this year. That may or may not be an opportunity.

MGK’s Future is Dependent on Performance of Technology Stocks

Vanguard Mega Cap Growth ETF has invested in almost all the mega-cap technology stocks. Its top 10 investments in this sector includes Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG & GOOGL), Facebook Inc. (META), NVIDIA Corp. (NVDA), Accenture plc (ACN), Adobe Inc. (ADBE), Advanced Micro Devices Inc. (AMD), and Netflix Inc. (NFLX). Baring AAPL, all other stocks generated negative growth during the past one year. During that period prices of AMZN, NVDA, GOOG and GOOGL fell by almost 20 percent. ADBE recorded a negative growth of 38 percent. Prices of NFLX and META fell by 58.5 percent and 55.3 percent respectively.

However, all these 10 stocks are among the best performers if considered over a longer time horizon. Despite such poor performance in 2022, all these stocks generated huge growth over the past 15 years. During that period prices of these stocks grew by at least 300 percent. During the same period, prices of AMZN, NVDA, AAPL, and NFLX grew between 2000 to 6000 percent. This explains the growth driver behind the market price of MGK. MGK’s price grew by 312 percent, 268 percent, 102 percent, and 60 percent over the past 15, 10, 5 and 3 years respectively.

Although the fund is diversified across the industry, it’s quite clear that MGK’s future is dependent on the performance of technology stocks. The price loss of technology stocks seems to be a short term phenomena and is driven by factors that cannot be controlled. GOOG and GOOGL had to suffer from the negative publicity of being caught sharing user data with a sanctioned Russian company. AMZN was mostly affected by the rising inflation, more than any other tech companies, given its dominance as a retail platform.

MSFT suffered due to a huge drop in personal computer (PC) sales and loss from international sales due to growing strength of the U.S. dollar. NVDA ACN, ADBE, and AMD, all suffered due to rising cost and lack of disposable income in the hands of consumers. A recessionary outlook all over the globe will continue to impact the mega-cap technology giants. Inflation impacted subscriptions too. NFLX lost almost one million subscribers in the second quarter of 2022. During the same period, META reported a decline in users for the first time ever.

Risks Associated with Vanguard Mega Cap Growth ETF

American technology giants are faring in an increasingly tough economic environment. The ongoing war in Ukraine that resulted in a supply-chain crisis and rising level of inflation, has severely impacted these companies. The rising popularity of TikTok, Snap and Twitter are adding more pain. TikTok is giving tough competition to GOOG’s YouTube, and META’s Instagram. As a result of all these, investors have preferred to stay away from the mega-cap technology stocks. These stocks are quite risky too, especially considering the kind of volatility they carry.

Being a mega-cap fund investing heavily in technology stocks, MGK’s shares are highly volatile. This happens because this ETF invests virtually all of its assets in common stocks of highly sought-after companies. In general, such funds are appropriate for investors who have a long-term investment horizon (ten years or longer), or are seeking growth in capital as a primary objective, and are prepared to endure the declines in share prices that may occur in the stock market. Price swings are the trade-off for the potentially high returns that common stocks can provide. The level of current income produced by MGK is so low that it does not have any impact on your portfolio.

Investment Thesis

Vanguard Mega Cap Growth ETF is a very good option for investors looking to invest in mega-cap technology stocks like AAPL, MSFT, AMZN, GOOG, GOOGL, META, NVDA, AMD, NFLX, etc. Historically, this fund has delivered a consistent price growth of around 15 percent, and is expected to deliver growth in the longer term. This has come on the back of some exceptionally high growth by its technology portfolio.

The price drop in 2022, though exceptionally high, seems to be a short term phenomena, and is driven by some uncontrollable factors. It will take some time for these American technology giants to overcome an increasingly tough economic and competitive environment. The war in Ukraine will have a long lasting impact. The fund also has some inherent risks. In my view, MGK is a good option for growth seeking investors, but only for those who look for an extremely longer time horizon of at least 10 years. In many ways, this fund also represents the United States as a business, so if you are bullish about this economy in the longer term, this fund is for you.