VOO Vs VOOG: What Are The Differences And Which Has A Better Outlook? (NYSEARCA:VOO)

How do the two ETFs differ?

The Vanguard S&P 500 ETF (NYSEARCA:VOO) and the Vanguard S&P 500 Growth ETF are two of the most popular wealth-generating ETFs around. VOO is incidentally one of the largest ETFs in the market with a total AUM of $235bn; this shouldn’t come as a great surprise as it offers the most cost-efficient route (a miserly expense ratio of only 0.03%) for those interested in pursuing a diversified basket of the 500 largest US stocks, as represented by the S&P500. It’s also worth bearing in mind that this is one of the most stable portfolios you could own, with a lowly annual turnover ratio of just 2% (just for some perspective, typically most ETFs in the US tend to replace roughly 39% of their holdings annually). This inherent stability makes it an ideal product for those who are looking to reap the benefits by sticking around for the long haul.

The Vanguard S&P 500 Growth ETF (NYSEARCA:VOOG), on the other hand, is what you could term as a subset of VOO, as it covers 239 stocks within the S&P500 that exhibit growth characteristics. Stocks are chosen based on a certain composite growth score, which in turn, is a function of a) the 3- year historical sales per share growth rate, b) the 3-year historical net change in adjusted EPS over share price, and c) the 12-month percentage price change. Within the broad growth universe, VOOG certainly screens very highly, with an expense ratio of 0.10%, but do consider that this is still more than 3x higher than the VOO’s corresponding figure. Also note that portfolio churn levels-whilst not on the higher side relative to the broad ETF universe- are 6x higher than VOO’s corresponding figure.

Then, given the presence of plenty of value stocks, it is no surprise to discover that VOO has the better income profile of the two ETFs; you can currently pocket a yield of 1.52%, which is more than 2x higher than what you get with VOOG (0.74%). VOO’s yield is also slightly better than the asset class median of 1.44%. VOO has also been more generous in growing its dividends which have grown by ~9% over the last 10 years and ~3% over the last three years. Worryingly, VOOG’s dividend outflows have actually shrunk over the last three years whilst they have only grown by 6% over the last 10 years.

How Have VOO And VOOG Performed?

2022 has been a challenging period for equity products across the board, and these two products are no exception, but what’s key here is that VOOG has underperformed VOO by 1.5x, and note that the degree of underperformance has only expanded in recent weeks.

Interestingly, both VOO and VOOG started trading on the same day- 7 th Sep 2010, so this makes for some rather handy long-term comparison tables. Since listing, investors have sided with the growth side of the market with VOOG outperforming VOO by around 1.2x.

The narrative provided by the historical returns can also be further enhanced by gauging the risk profile of these two ETFs and how they have managed to mitigate risks and generate returns, both over the long-term, as well as the short-term.

So, what’s rather clear from the table above is that VOOG is the more volatile product of the two; the variance in the respective standard deviations is not a great deal (around 60bps) when gauged over the long-term, but certainly over the last three years, you can see that VOOG has become a lot more volatile (the difference in standard deviations over the last three years is closer to 200bps). Ordinarily, this should have put off investors with a low-risk appetite, but I’d urge you to consider the relative Sharpe ratios of the two ETFs which gives you a sense of an ETF’s ability to generate excess returns (relative to the risk-free rate) after digesting the respective standard deviations. Note that despite a more elevated standard deviation, VOOG has been able to generate better excess returns over the long run, and whilst the number has dropped over the last three years, it is still better than VOO’s ratio.

The Sortino ratio gives you a sense of how the excess return generating ability of these ETFs when viewed through the prism of only downside deviation, and even here, VOOG has done a much better job across the different time frames.

Is VOO Or VOOG The Better ETF For Investors?

As mentioned in the introductory section, VOO comes across as the more cost-efficient and stable option of the two ETFs, whilst also offering a fairly decent income angle (which can’t be said of VOOG). It’s also not particularly top-heavy (VOO’s top-10 holdings only account for 29% of the total portfolio, whilst VOOG’s top-10 holdings account for a whopping 55% of the total portfolio), and given that it tracks the S&P500, it’s also a lot more diversified across sectors, offering a good mix of growth and value stocks; this aspect has certainly abetted it in 2022 when growth stocks, particularly tech stocks, are getting pulverized.

Having said all that, I still don’t think you should write off VOOG, and it could well turn out to be something of a dark horse.

Firstly, it would be wrong to measure all growth and tech stocks with the same lens. I can appreciate that some correction may have been warranted, particularly for the smaller names, a lot of whom don’t generate ample earnings (these names would warrant a higher cost of capital even as the general interest rate environment gets hotter). However, most of the growth stocks that VOOG covers, have been around the blocks, and are still expected to deliver some largely compelling earnings growth numbers, both over the short-term, as well as the long-term. In fact YCharts estimates currently point to VOOG’ s expected earnings growth of 37% over the next year, and 15% over the next five years! With VOO’s constituents the corresponding weighted average earnings growth numbers are lower, with 25% expected next year, and 14% over the next five years.

A lot has been made about sky-high valuations of the growth names, but I do wonder if we’ve now reached a juncture where this narrative may now be turning out to be rather banal. As mentioned earlier, VOOG’s top-10 stocks will likely play a more pronounced role in the ETF’s prospects than VOO; in light of that, let’s consider the forward P/E valuations of VOOG’s top-10 names. As you can see from the image below, except for Amazon, all of VOOG’s top-10 names are currently available at a forward P/E discount, relative to their long-term averages (on a weighted average basis, the top-10 names are available at a discount of 23% relative to the long-term figure). Over the last few years, I’ve noticed there have rarely been any instances where you could pick up so many elite growth names at a discount to their long-term averages. It’s not as though these stocks have turned into bog-standard businesses overnight.

There are also some technical considerations to be highlighted. As you can imagine VOOG is heavily oriented towards the tech and communication services sectors, which jointly account for 53% of the portfolio (for VOO these sectors jointly account for only 35%). Most of these stocks trade on the Nasdaq 100, which has now entered the oversold territory, as indicated by the 14-day RSI indicator, and could be due for a bounce.

I’d substantiate this by also highlighting developments on the long-term relative strength chart of VOOG and VOO. Notice that from 2020, this ratio had spiked outside its long-term channel and you could argue that things had looked overbought for a good two years. Now, this ratio has pulled back into the old channel, and whilst there’s still potential for it to drop to the channel lows, you ought to consider that the risk-reward isn’t as great as it was in late 2021 when the ratio looked rather overbought at 0.7x levels. I certainly don’t believe you can say it’s overbought anymore and this could lead to some interest in the VOOG counter as bargain hunters come on board.

In addition to that, also consider looking at the respective standalone charts of the two ETFs; both ETFs have come off quite a bit from their lifetime highs, but VOOG has witnessed more pronounced selling and appears to be a lot closer to a potential floor (around 5% away from its old congestion zone). I’m referring to that grey highlighted area from August 2020 to November 2020 where we saw the ETF stall at those levels. With VOO, on the other hand, it is still some 12% away from what is its old congestion zone below the $320 levels.

To conclude, structurally VOO comes across as the better option, and the tide may well be against VOOG at the moment, but things may reverse course soon enough. Don’t write it off.