VONG: It's Time To Sell And Reallocate Investments

seekingalpha2024-07-25

Consider selling a stake in Vanguard Russell 1000 Growth Index Fund ETF Shares due to potential downside risk from slowing growth and high valuations.Shift in investor sentiment towards other sectors ...

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href=https://seekingalpha.com/article/4706464-vong-its-time-to-sell-and-reallocate-investments><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Consider selling a stake in Vanguard Russell 1000 Growth Index Fund ETF Shares due to potential downside risk from slowing growth and high valuations.Shift in investor sentiment towards other sectors ...</p>\n\n<a href=\"https://seekingalpha.com/article/4706464-vong-its-time-to-sell-and-reallocate-investments\">Source 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Growth Index Fund ETF Shares (NASDAQ:VONG) and allocate investments to other stocks or ETFs. This strategy can eventually help investors capitalize on the recent gains and position them for the potential volatility in the coming months. The downside risk is mainly due to a slowing growth trend, lofty valuations and increasing dispersion between the top 10 S&P 500 companies and the rest of the index. Therefore, I initiate coverage of VONG with a sell rating. A Risk of Correction Increases As the bull run is mainly driven by magnificent seven and a few other tech stocks, I strongly believe that the continuation of the trend needs a sustainable revenue and earnings growth from mega-caps along with a backing from macro and valuation-related factors. However, this appears to be challenging because growth has been slowing and valuations reached late 2021 peak level. Therefore, the risk of correction increased significantly. Mega-caps price performance since July 10  For example, NVIDIA’s (NVDA) shares plunged more than 8% in the last two weeks, while Meta Platforms (META) lost nearly 9% of its value. Other magnificent seven stocks such as Microsoft (MSFT) and Alphabet (GOOG) (GOOGL) have also begun reversing the recent gain. Moreover, the software industry within the tech sector, which grew nearly 60% last year and played a key role in the acceleration of the bull run, continues to underperform significantly so far in 2024. The key software companies such as, Salesforce (CRM) and Adobe (ADBE) are trading in the red year to date because of a significant decline in their revenue and earnings growth pace. Various ETFs price performance Vs VONG since July 10 (seeking Alpha) Meanwhile, the positive performance from other sectors during the same time signals investors’ rotation out of mega-caps to other sectors. Vanguard Financials Index Fund ETF Shares (VFH), Vanguard Industrials Index Fund ETF Shares (VIS) and Vanguard Health Care Index Fund ETF Shares (VHT) generated solid price returns in the past two weeks, outperforming the S&P 500 and tech category. In fact, Vanguard Health Care Index Fund ETF Shares outperformance compared to other sector-focused ETFs indicates that investors are moving towards safe stocks with the potential to reduce the downside risk. I believe the recent selloff in mega-caps is an inflection point and investors should carefully watch the shift in trends. Furthermore, there is also an economic risk for the stock market. As the inflation has been hovering around 3% with a strong job market, the Fed is expected to make only one rate cut later in 2024. Consequently, the US economic growth is likely to remain soft in 2024. In the first quarter, the US GDP grew only 1.4% compared to 3.3% growth in the previous quarter, with expectations that full year growth may decline to around 2% in 2024 compared to 2.5% increase in the last year. VONG: Time to Capitalize on Gains VONG share price Vs S&P 500 (Seeking Alpha) Vanguard Russell 1000 Growth Index Fund ETF Shares generated an exceptional 70% price gain in the past eighteen months, thanks to its portfolio concentration in the magnificent seven and other large cap tech stocks. The magnificent seven stocks accounted for more than half of the S&P 500 returns year to date. As stated above that the crowd momentum in mega and a few large caps from the tech category drove the bull run and it’s challenging for these companies to sustain the momentum for a longer time, the downside risk is higher for VONG due to its high concentration in the top 10 holdings. VONG’s top 10 holdings, which are mainly composed of magnificent seven stocks, account for 60% of its portfolio compared to the one third of weight in the S&P 500 index. The rest of VONG’s 400 growth stocks represent nearly 40% of the entire portfolio. In the case of a correction, the impact on VONG’s share price will be significantly higher than the broader market index. Therefore, it’s a great time to capitalize on gains by selling a stake in a mega-cap tech-focused ETF. S&P 500 growth stocks forward valuation (Seeking Alpha) Furthermore, VONG’s high concentration in mega-caps has also significantly increased its valuation compared to the broader market index and the S&P 500 growth category. Its shares are trading around 39 times earnings compared to the S&P 500 growth category of 28 times. The growth category is currently trading around the highest level last seen in late 2021. Higher valuations, increasing inflation and Fed's tightening had created a swear bear trend in early 2022, which lasted throughout the year. It’s also true that high valuations do not always signal a risk of correction. However, the concerning factor here is that mega-cap stocks may not sustain the growth trend they witnessed in the last year, which could negatively impact investor sentiment. Two of the magnificent seven companies, including Apple (AAPL) and Tesla (TSLA), are expected to post flat or negative growth in 2024 while the growth rate for Microsoft is also forecasted to decline to a single-digit rate in the following quarters. The slowing growth trend is also forecasted for NVIDIA, which has seen more than 200% revenue and 700% EBITDA growth in the last twelve months. The forward growth rate for these two metrics is expected to decline to 80% and 166% in the next twelve months. Meanwhile, Amazon.com (AMZN), Meta Platforms, and Alphabet are expected to sustain double-digit growth. Overall, I believe it’s prudent to use early signs of the potential volatility as an opportunity to capitalize on the recent gains while moving investments to less volatile ETFs. Reallocation is Crucial As challenges are increasing for mega-caps to sustain their exceptional share price and financial growth momentum in the coming quarters, it might be a good strategy to reallocate investments. One way to reduce the risk factor is focusing on an equal weighted index. Rotating out of the tech sector to industrials, energy, healthcare, consumer defensive and consumer staples could also help investors lower the downside risk. Closely following the second quarter results of various sectors may also contribute to unlocking new opportunities. Dividend investing could also be one of the best options investors can use to generate returns and limit the downside risk. In Conclusion  Timing has always been crucial in investing. Missing the right exit point can derail returns an investor earned from an asset class. As the market trend begins to shift and volatility is expected to increase, selling an entire or portion of a stake in VONG and allocating funds to other safe categories could be a smart strategy. This strategy will help investors capitalize on exceptional gains in the past eighteen months along with increasing portfolio resilience to cope with the potential volatility.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454840680"}