The Vanguard Growth ETF (VUG) experienced a sharp decline on Friday, sliding approximately 2.7% to $86.79 in midday trading. The drop was part of a broader tech-led selloff that pressured major holdings including Nvidia, Apple, and Microsoft. This reversal came despite the fund's impressive 27.64% gain over the past year and its ultra-low expense ratio of just 0.03%.
The selloff was triggered by a stronger-than-expected U.S. jobs report for May, which showed payrolls rising by 172,000—well above the 85,000 forecast. The data pushed bond yields higher and reignited expectations for further interest rate hikes, prompting a sharp rotation out of growth and chip stocks. The Philadelphia semiconductor index also slipped after a strong rally.
VUG, which tracks large-cap growth stocks, is heavily concentrated in the technology sector. According to Zacks, information technology accounts for about 57.3% of the fund's assets, with top holdings in Nvidia, Apple, and Microsoft making up over half of its portfolio. The top 10 holdings alone represent 53.63% of assets, underscoring the fund's lack of diversification.
The broader ETF landscape saw similar moves. The Invesco QQQ Trust (QQQ) fell 3.4%, while the Vanguard Russell 1000 Growth ETF (VONG) lost 2.3%. Both funds have significant exposure to large-cap tech names. In contrast, the Vanguard Small-Cap Growth ETF (VBK) dropped even more—down 3.6% to $343.70—despite its broader diversification across 550 stocks.
Passive investing has come under renewed scrutiny this week after Vanguard's S&P 500 ETF (VOO) crossed the $1 trillion mark in assets, becoming the first ETF to reach that milestone. The milestone highlights the growing popularity of low-cost index funds, but also raises concerns about concentration risk in market-cap-weighted strategies.
Walter Todd, chief investment officer at Greenwood Capital, likened the AI-fueled rally to a high-speed race car, warning that "it doesn't take much to cause an accident at that speed." His comment reflects growing unease among investors about the sustainability of the tech rally, especially if interest rates continue to rise.
For investors, the choice between growth ETFs now hinges on risk tolerance. VUG and VONG offer low-fee access to large-cap growth, QQQ leans heavily into Nasdaq names, and VBK provides a more diversified small-cap approach. However, the key question remains: will investors continue to pay up for growth if rate hikes persist?
