Is the Vanguard Mega Cap ETF the Simplest Way to Invest in the Top S&P 500 Stocks?

Key Points

• The fund targets the 37% largest S&P 500 components by market cap.

• The Vanguard Mega Cap ETF is more concentrated than the Vanguard S&P 500 ETF.

• The fund offers investors more growth exposure while still holding top value and dividend stocks.

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The S&P 500 (SNPINDEX: ^GSPC) and exchange-traded funds (ETFs) that closely track it, like the Vanguard S&P 500 ETF (NYSEMKT: VOO), have historically been effective tools for compounding wealth over time. However, in today's day and age of low-cost ETFs, investors can find products that better suit their interests and investment objectives without racking up high fees.

The Vanguard Mega Cap ETF (NYSEMKT: MGC) has an expense ratio of 0.07% compared to 0.03% for the Vanguard S&P 500 ETF. That's just a $4 difference for every $10,000 invested.

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Here's why the Vanguard Mega Cap ETF may be a better fit than the Vanguard S&P 500 ETF for investors looking to get exposure to top S&P 500 stocks.

Image source: Getty Images.

The biggest of the big

The Vanguard Mega Cap ETF concentrates its holdings in mega-cap growth, dividend, and value stocks. Other well-known Vanguard funds, like the Vanguard Growth ETF (NYSEMKT: VUG) filters out value stocks, and Vanguard Value ETF (NYSEMKT: VTV) excludes growth stocks.

In this vein, the Mega Cap ETF is essentially a bet that the biggest companies will outperform the smaller S&P 500 components. The Mega Cap ETF has just 185 holdings compared to 504 for the Vanguard S&P 500 ETF. The concentration shows up in the list of the top 20 holdings.

Data source: Vanguard.

As you can see in the table, the largest 20 holdings in the Vanguard Mega Cap ETF make up well over half of the total fund, whereas the top 20 holdings in the S&P 500 make up just under half of the index.

The S&P is already much more concentrated than in years past, as mega-cap growth stocks like the "Ten Titans" alone make up 38% of the index. But the Mega Cap ETF takes that concentration as a step further by allocating the weighting that was going to the bottom 315 holdings into the 185 largest.

A growth-driven ETF

The Mega Cap ETF is inherently more growth-focused than the S&P 500 because many growth-focused sectors are centered around just a handful of mega cap stocks. For example, the five top holdings in the Vanguard Information Technology ETF (NYSEMKT: VGT) -- which are Ten Titan stocks Nvidia, Microsoft, Apple, Broadcom, and Oracle -- make up a staggering 53.2% of the ETF. Similarly, Amazon and Tesla dominate the consumer discretionary sector -- which has a 14.2% weighting in the Mega Cap ETF versus 10.4% in the S&P 500 ETF.

The difference has made a subtle impact over time, as the Mega Cap ETF has a 308.1% total return over the last decade, outperforming the S&P 500 ETF's 284.2% total return.

The emphasis on mega cap growth shows up in the fund's valuation, as the Mega Cap ETF sports a price-to-earnings (P/E) ratio of 28 and a dividend yield of 1% compared to a 27 P/E for the S&P 500 ETF and a 1.2% yield.

Using the Vanguard Mega Cap ETF in a diversified portfolio

The Vanguard Mega Cap ETF is a good fit if you're looking to get low-cost, diversified exposure to the largest U.S. companies. An especially effective way to use this particular ETF could be to pair it with individual holdings in companies that don't have massive market caps.

Since the market cap of the S&P 500 is around $53.6 trillion, it takes a stock with a $536 billion market cap just to have a 1% weight in the index. By pairing a fund like the Mega Cap ETF with a portfolio of companies that aren't well represented in the S&P 500, you can maintain diversification while still participating in the companies that are moving the broader indexes.

All told, the Vanguard Mega Cap ETF is a simple way to invest in the largest S&P 500 stocks and may be a better choice for certain investors than the Vanguard S&P 500 ETF.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Costco Wholesale, Home Depot, JPMorgan Chase, Mastercard, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Tesla, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF, Visa, and Walmart. The Motley Fool recommends Broadcom and Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.