A Roth IRA offers unique benefits for investment growth. Since retirement withdrawals are tax-free, households that invest more aggressively in a Roth can maximize the benefits of long-term capital appreciation. This is why I created it Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) the cornerstone of my retirement plan.
Let me explain why this fund should be considered a Roth IRA anchor holding, and how it compares to Warren Buffett’s. S&P 500 index fund.
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The Vanguard S&P 500 Growth ETF delivered a compelling return, gaining 34.54% from Jan. 1 to Nov. 26, 2024, outperforming the broader S&P 500’s 27.66% return, including dividends and implied returns. The fund achieves this strategic performance by focusing on 234 growth-oriented companies from within the S&P 500, selected based on factors such as revenue growth and momentum.
The fund’s technology-heavy portfolio reflects the digital transformation that is shaping our economy. Information technology comprises about 50% of the holdings, led by industry giants such as Apple, Nvidiaand Microsoft. These companies’ innovation and market leadership provide a solid foundation for continued growth.
Despite its size, the fund maintains high standards. The portfolio holds a 39.7% return on equity and a 25.2% earnings growth rate. This combination of profitability and leverage helps justify a higher price-to-earnings ratio of 35 compared to the S&P 500’s 26.9 multiple.
Warren Buffett recommends a simple strategy: invest 90% of your savings in an expensive fund like the S&P 500 Vanguard S&P 500 ETF(NYSEMKT: VOO). This strategy provides broad exposure to the market with an even lower 0.03% cost ratio.
Although the Vanguard S&P 500 ETF offers excellent diversification across 504 stocks, its mix of growth and value companies has historically underperformed the growth-focused fund during strong market cycles. Trading comes in a low volatility and deep variable segment.
Investments are important because they directly reduce your return. The Vanguard S&P 500 Growth ETF charges an annual fee of 0.10%, meaning you’ll pay $10 in fees per year on a $10,000 investment. In comparison, the Vanguard S&P 500 ETF charges just 0.03%, or $3 a year for a single investment.
While this $7 annual difference may seem small, it adds up over time to your return on investment. However, if the fund’s high growth continues, it could more than offset this modest fee differential. Both funds are among the most cost-effective in their categories, with the industry average running ten times higher.
The Vanguard S&P 500 Growth ETF’s main exposure comes with increased volatility. The fund’s beta of 1.11 means it reacts to market movements the most — when the broader market rises by 10%, the fund has consistently risen as much as 11.1%, but it also falls sharply during downturns. For long-term Roth IRA investors, this increased short-term strength may be worth receiving in exchange for greater growth.
Both currencies share a large overlap in their top holdings, meaning they tend to move in similar directions. The key difference lies in the growth fund’s increased exposure to companies that show strong growth trends. To date, the Vanguard S&P 500 Growth ETF has outperformed the Vanguard S&P 500 ETF since its inception:
VOO full level returns, data by YCharts.
The tax benefits of a Roth IRA make it a perfect investment strategy. Since retirement withdrawals are tax-free, earning higher returns through growth-oriented investing can lead to much larger after-tax wealth for decades to come.
For investors with the long term and tolerance for volatility, the Vanguard S&P 500 Growth ETF provides an attractive vehicle to maximize the benefits of tax-free growth in a Roth IRA. It may experience severe downturns during market corrections, but its focus on the quality of growth companies positions it well for long-term wealth creation.
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George Budwell has positions in Apple, Microsoft, Nvidia, Vanguard Admiral Funds-Vanguard S&P 500 Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and the Vanguard S&P 500 ETF. The Motley Fool 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.
Building Long-Term Wealth: Why I Chose This Vanguard Growth Fund for My Roth IRA was originally published by The Motley Fool.
