Meet the Spectacular Vanguard ETF With 45.8% of Its Portfolio Parked in Nvidia, Alphabet, Apple, and Microsoft

The CRSP U.S. Total Market Index is made up of all 3,498 companies listed on American stock exchanges. However, the 59 largest companies represent a staggering 70% of the index's total market capitalization, highlighting the extreme concentration of wealth in the corporate sector.

The CRSP U.S. Mega Cap Growth Index exclusively holds those 59 companies. Its top four positions are Nvidia, Apple, Alphabet, and Microsoft, which isn't a surprise given their enormous combined market cap of $17.4 trillion.

The Vanguard Mega Cap Growth ETF (MGK +0.57%) is an exchange-traded fund (ETF) that tracks the performance of the Mega Cap Growth Index by holding the same stocks. Here's how adding it to a diversified portfolio could lead to strong long-term returns.

Given the sheer size of the four largest holdings in the CRSP U.S. Mega Cap Growth Index (and by extension, the Vanguard ETF), they represent a whopping 45.8% of the value of its entire portfolio.

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Stock

Vanguard ETF Portfolio Weighting

1. Nvidia

13.77%

1. Apple

11.79%

1. Alphabet

11.55%

1. Microsoft

8.69%

Those four companies are very different, but they have one thing in common: They are operating at the forefront of the artificial intelligence (AI) revolution.

The AI boom started gathering momentum in early 2023, when OpenAI's ChatGPT application amassed over 100 million users and sparked a development race among America's biggest tech companies. Since then, Nvidia, Apple, Alphabet, and Microsoft have delivered a median return of 236%, so they have been a key source of upside for the Vanguard ETF.

One little-known company, called an "Indispensable Monopoly" owns the technology Nvidia, AMD, and Intel cannot function without. And it is still just a fraction of Nvidia’s size.

We just released a brand-new report with the full story and the company’s name.

Some of the other AI powerhouses in the Vanguard ETF include Broadcom, Amazon, Meta Platforms, Tesla, and Palantir Technologies. But even though the technology sector accounts for 70% of the ETF (by value), it does offer a splash of diversification with positions in pharmaceutical giant Eli Lilly, payments powerhouses Visa and Mastercard, and industrial titan Boeing.

The Vanguard Mega Cap Growth ETF has delivered a compound annual return of 13.6% since it was established in 2007, comfortably outpacing the average annual return of 10.3% in the S&P 500 (^GSPC +0.22%) over the same period. However, given its highly concentrated portfolio of just 59 stocks, investors probably shouldn't park all of their money in this one fund.

Instead, it might be a better idea to add the ETF to a diversified portfolio of other funds or individual stocks to minimize potential downside risks. Tech giants are spending hundreds of billions of dollars to develop AI right now, which could lead to significant losses if the technology fails to live up to expectations over the long term. That could drag down their stock prices, which would directly lead to losses for the ETF, too.

Investors who parked $10,000 in an S&P 500 index fund back in 2007 would be sitting on $64,407 today. But had they split the $10,000 by placing $5,000 in the S&P 500 and the other $5,000 in the Vanguard ETF, they would have $88,587 today instead. Meanwhile, they would have smoothed out some of the volatility that comes with significant exposure to the technology sector.

As a result, this Vanguard ETF looks like a great buy, but risk management might be key to generating the best results over the long run.