What is VO? (Pros, Cons, and Strategies)

If you're concerned about diversifying your portfolio and seeking a balance between growth and stability, VO—Vanguard Mid-Cap ETF—could be an excellent option to consider. This ETF focuses on mid-cap companies, offering a unique blend of growth potential and financial stability. In this post, we will explore what VO is, its key features, and delve into its advantages and disadvantages, along with some investment strategies.

What is VO?

VO is a well-established ETF in the U.S. stock market. VO stands for Vanguard Mid-Cap ETF.

VO tracks the CRSP US Mid Cap Index, which includes mid-sized companies that demonstrate both growth potential and stability in their business operations.

Unlike large-cap ETFs that focus on massive companies or small-cap ETFs that target smaller, often riskier businesses, the index that VO follows invests in mid-cap companies. These companies, generally with a market capitalization ranging from $2 billion to $10 billion, offer a balance between the high growth potential of small caps and the stability of large caps.

Key Features of VO

• Investments in a broad spectrum of mid-sized companies
• Companies with market capitalizations typically between $2 billion and $10 billion
• A portfolio that aims to provide exposure to the mid-cap segment's potential for both growth and stability

After selecting companies based on the CRSP US Mid Cap Index, VO includes approximately 350 to 400 stocks to create a diversified portfolio.

VO Composition

VO consists of a wide array of mid-cap companies across various sectors such as industrials, technology, consumer discretionary, and healthcare. It includes companies like Chipotle Mexican Grill (CMG), IDEXX Laboratories (IDXX), and Match Group (MTCH). This diversified composition ensures that VO provides exposure to multiple industries, reducing sector-specific risks.

Pros of VO

Balance Between Growth and Stability

Mid-cap companies often lie in a sweet spot where they have overcome the initial struggles of small businesses and yet still possess significant growth potential. VO captures this medium-term growth potential while also maintaining a considerable level of stability.

This characteristic makes VO particularly appealing for investors who want growth opportunities with less volatility than small-cap stocks.

Diversification

VO includes a large number of stocks across multiple sectors, offering a high level of diversification. This diversification reduces the risk associated with investing in a single company or industry, potentially leading to more stable returns over the long term.

Competitive Expense Ratio

VO boasts a competitive expense ratio of 0.04%, which is exceptionally low compared to many other ETFs. This low expense ratio reduces the cost of investment management, enhancing net returns over the long term.

Liquidity

With a substantial number of assets under management (AUM), VO is highly liquid. This liquidity ensures that investors can easily buy and sell shares without significantly impacting the market price.

Cons of VO

Moderate Dividend Yield

VO's dividend yield typically ranges from 1.5% to 2%, which is lower than some high-dividend ETFs. Investors seeking regular, high-yield dividends might find other ETFs more suitable.

Mid-Cap Specific Risks

While mid-cap companies offer a blend of growth and stability, they are not without risks. These companies may still face significant growth challenges, regulatory pressures, and market competition. Hence, VO might be more volatile than large-cap ETFs.

VO Investment Strategies

VO is a versatile ETF that caters to a broad range of investors. Below are some strategies you can consider when investing in VO.

Long-term Growth Strategy

For those planning long-term investments of 10 years or more, VO is an attractive option due to its growth potential and lower volatility compared to small-cap ETFs. This strategy involves consistent investments over time, benefiting from the compounding growth of mid-cap companies.

With a long-term horizon, investors can withstand short-term market fluctuations and potentially reap the benefits of sustained growth.

Diversification within a Portfolio

Using VO as a component within a larger, diversified portfolio can mitigate risks. Combining VO with large-cap and small-cap ETFs can create a balanced portfolio that captures diverse market opportunities.

Rebalancing Strategy

Given its moderate stability, VO can be part of a rebalancing strategy where it acts as a stabilizer between high-risk, high-reward small caps, and the lower-risk, more stable large caps. Periodically rebalancing your portfolio to maintain your desired asset allocation can also enhance long-term returns.

Supplement to Income Strategy

Even though VO has a relatively low dividend yield, it can still be part of an income-generating portfolio when combined with higher-yield options. Investors can use VO to bring growth stability while relying on other instruments for income.

Conclusion

VO offers a balanced approach to equity investing, blending the growth potential of small caps with the stability of large caps. Its diversified composition, competitive expense ratio, and liquidity make it an excellent choice for long-term investment strategies. Though it carries some risk and offers moderate dividend yields, its advantages often outweigh the cons, making it a strong candidate for inclusion in a diversified investment portfolio. Whether you’re planning for long-term growth or looking to balance a range of investments, VO can be a valuable addition to your strategy.