Building Long-Term Wealth: Why I Chose This Vanguard Growth Fund for My Roth IRA

A Roth IRA offers unique advantages for growth investing. Since withdrawals in retirement are tax-free, housing aggressive growth investments in a Roth can maximize the benefits of long-term capital appreciation. This is why I’ve made the Vanguard S&P 500 Growth ETF (NYSEMKT: VOOG) the cornerstone of my retirement strategy.

Let me explain why this fund deserves consideration as a Roth IRA anchor holding, and how it compares to Warren Buffett’s preferred S&P 500 index fund.

A drawing of various retirement plans along with a growth chart.

Image source: Getty Images.

The growth advantage and tech’s influence

The Vanguard S&P 500 Growth ETF has delivered compelling returns, gaining 34.54% from Jan. 1 through Nov. 26, 2024, outpacing 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-focused companies from within the S&P 500, selected based on factors like earnings expansion and momentum.

The fund’s technology-heavy portfolio reflects the digital transformation reshaping our economy. Information technology comprises nearly 50% of holdings, led by industry giants like Apple, Nvidia, and Microsoft. These companies’ sustained innovation and market leadership provide a strong foundation for continued growth.

A quality-focused approach and an alternative to Buffett’s recommendation

Despite its growth tilt, the fund maintains high standards. The portfolio’s holdings have a 39.7% return on equity and 25.2% earnings growth rate. 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 multiple.

Warren Buffett recommends a simpler approach: investing 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 0.03% expense ratio.

Although the Vanguard S&P 500 ETF provides excellent diversification across 504 stocks, its blend of growth and value companies has historically produced lower returns than the growth-focused fund during strong market cycles. The trade-off comes in reduced volatility and deeper sector diversification.

Understanding the cost difference

Investment fees matter because they directly reduce your returns. The Vanguard S&P 500 Growth ETF charges an annual expense ratio 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 annually on the same investment.

While this $7 annual difference might seem small, it compounds over time along with your investment returns. However, if the growth fund’s higher returns persist, they could more than offset this modest fee differential. Both funds rank among the most cost-efficient in their categories, with industry averages running nearly 10 times higher.

Risk and reward

The Vanguard S&P 500 Growth ETF’s concentrated exposure does come with increased volatility. The fund’s beta of 1.11 means it tends to amplify market movements significantly — when the broader market rises 10%, this fund historically rises about 11.1%, but it also falls more sharply during downturns. For long-term Roth IRA investors, this heightened short-term volatility may be worth accepting in exchange for greater growth potential.

Are the wealthy getting away with not paying their fair share of taxes, or are they carrying an unfair burden? The debate over the top tax bracket rages on as concerns about income inequality and the concentration of wealth at the top of the economic ladder continue to make headlines. Senators Bernie Sanders and Elizabeth Warren have both proposed a wealth tax on the ultra-rich, while even multi-billionaire Warren Buffett has vocally expressed support for the idea, suggesting that it is fair for wealthy Americans to be taxed at a higher rate.

Currently, the top federal income tax rate stands at 37%, applicable to incomes of $539,000 and higher for single taxpayers and $647,850 and higher for couples filing jointly. However, historical data reveals that the top marginal tax rate has been significantly higher in previous eras. In 1944 and 1945, it peaked at a staggering 94%, and in the late 1980s, it hit a low of 28% under former President Ronald Reagan.

Historical Context and Present Day

The taxation of the wealthy has fluctuated significantly throughout U.S. history, demonstrating both higher and lower levels of taxation than the current status. This historical perspective adds complexity to the ongoing debate regarding whether the rich are paying their fair share of taxes. Despite the disputes, recent data from the IRS sheds light on the current tax scenario.

Top 1% Tax Contributions

In 2020, the top 1% of taxpayers—those earning $561,351 or more—contributed a significant 42.3% of the total tax revenue collected. This translates to the top 1% paying more income taxes than the bottom 90% combined. Astonishingly, the top 1% paid a staggering $723 billion in income taxes, while the bottom 90% collectively contributed $450 billion.

State-Level Analysis

Examining the tax burden on the wealthiest individuals at the state level yields interesting findings:

Alabama Minimum income to be considered 1%: $404,560 Average income of the 1%: $1,107,769 Average income tax paid by the 1%: $263,845 Average tax rate of the 1%: 23.82% Alaska Minimum income to be considered 1%: $466,905 Average income of the 1%: $999,772 Average income tax paid by the 1%: $253,754 Average tax rate of the 1%: 25.38% Arizona Minimum income to be considered 1%: $485,146 Average income of the 1%: $1,464,848 Average income tax paid by the 1%: $369,426 Average tax rate of the 1%: 25.22% Arkansas Minimum income to be considered 1%: $387,666 Average income of the 1%: $1,483,925 Average income tax paid by the 1%: $313,266 Average tax rate of the 1%: 21.11% California Minimum income to be considered 1%: $726,188 Average income of the 1%: $2,430,790 Average income tax paid by the 1%: $655,180 Average tax rate of the 1%: 26.95% Colorado Minimum income to be considered 1%: $609,919 Average income of the 1%: $1,799,148 Average income tax paid by the 1%: $465,284 Average tax rate of the 1%: 25.86% Analysis of Minimum Income of the Wealthiest 1% and Average Tax Rates by State Analysis of Minimum Income of the Wealthiest 1% and Average Tax Rates by State

Both funds share significant overlap in their top holdings, meaning they often move in similar directions. The key difference lies in the growth fund’s more concentrated exposure to companies demonstrating stronger growth characteristics. Speaking to this point, the Vanguard S&P 500 Growth ETF has markedly outperformed the Vanguard S&P 500 ETF since inception:

VOO total return level, data by YCharts.

The long-term view

A Roth IRA’s tax advantages make it particularly well suited for aggressive growth investments. Since withdrawals in retirement are tax-free, capturing higher returns through growth-focused funds can lead to substantially larger after-tax wealth over decades of compounding.

For investors with a long time horizon and tolerance for volatility, the Vanguard S&P 500 Growth ETF offers an attractive vehicle for maximizing the benefits of tax-free growth in a Roth IRA. It may experience sharper declines during market corrections, but its focus on quality 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 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.