A Roth IRA offers unique benefits for growth investing. Because withdrawals in retirement are tax-free, housing aggressive growth investments in a Roth can maximize the benefits of long-term capital growth. This is why I have the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) the cornerstone of my retirement strategy.
Let me explain why this fund deserves attention as a Roth IRA anchor holding, and how it compares to Warren Buffett’s preferred funds. S&P500 index fund.
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The Vanguard S&P 500 Growth ETF has delivered compelling returns, with a 34.54% gain from January 1 through November 26, 2024, surpassing the broader S&P 500’s 27.66% return, including distributions and assuming reinvestment. The fund achieves this stellar performance by focusing on 234 growth-oriented companies from the S&P 500, selected based on factors such as earnings growth and momentum.
The fund’s technology-rich portfolio reflects the digital transformation that is reshaping our economy. Information technology comprises almost 50% of businesses, led by industry giants such as Apple, NvidiaAnd Microsoft. The continued innovation and market leadership of these companies provide a strong foundation for continued growth.
Despite the growth tilt, the fund maintains high standards. The investments in the portfolio have a return on equity of 39.7% and a profit growth of 25.2%. This combination of profitability and expansion potential helps justify the portfolio’s higher price-to-earnings ratio of 35, compared to the S&P 500’s 26.9.
Warren Buffett recommends a simpler approach: invest 90% of retirement savings in a low-cost S&P 500 fund like the Vanguard S&P 500 ETF (NYSEMKT:VOO). This strategy offers broader market exposure with an even lower expense ratio of 0.03%.
While the Vanguard S&P 500 ETF provides excellent diversification across 504 stocks, the combination of growth and value companies has historically delivered lower returns than the growth-oriented fund during strong market cycles. The trade-off results in reduced volatility and deeper sector diversification.
Investment costs are important because they directly reduce your return. The Vanguard S&P 500 Growth ETF charges an annual expense ratio of 0.10%, which means you’ll pay $10 in fees per year for a $10,000 investment. By comparison, the Vanguard S&P 500 ETF charges just 0.03%, or $3 per year, for the same investment.
While this $7 annual difference may seem small, it adds up over time, along with your investment returns. However, if the growth fund’s higher returns continue, they could more than offset this modest fee difference. Both funds are among the most cost-efficient in their categories, with sector averages almost ten times higher.
The Vanguard S&P 500 Growth ETF’s concentrated exposure comes with increased volatility. The fund’s beta of 1.11 means it amplifies market movements significantly: when the broader market rises 10%, this fund historically rises by around 11.1%, but it also falls more sharply during recessions. For long-term Roth IRA investors, this increased short-term volatility may be worth accepting in exchange for greater growth potential.
Both funds share significant overlap in their top positions, meaning they often move in the same direction. The main difference lies in the growth fund’s more concentrated exposure to companies that exhibit stronger growth characteristics. On this point, the Vanguard S&P 500 Growth ETF has significantly outperformed the Vanguard S&P 500 ETF since its inception:
The tax benefits of a Roth IRA make it particularly suitable for aggressive growth investing. Because withdrawals in retirement are tax-free, earning higher returns through growth-oriented funds can lead to significantly greater after-tax wealth over decades of accumulation.
For investors with a long time horizon and tolerance for volatility, the Vanguard S&P 500 Growth ETF offers an attractive vehicle to maximize the benefits of tax-free growth in a Roth IRA. It may experience sharper declines during market corrections, but its focus on high-quality growth companies puts it well-positioned 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 Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to 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
