It is easy to make the mistake of chasing performance on Wall Street. That's why fad investments rise to bubble status, as people who fear they are missing out blindly follow the crowd.

Eventually, the fads end, with the last people in the door often shouldering material losses. It is why you need to make sure you understand what you are buying. That is equally true with broad-based exchange-traded funds (ETFs) like the Vanguard S&P 500 Growth ETF (VOOG -6.11%). Here's why.

It starts with the S&P 500 index

The starting point for Vanguard S&P 500 Growth ETF is the S&P 500 (^GSPC -5.97%) index, so that is where the discussion has to start. The S&P contains roughly 500 stocks that have been selected by a committee based on multiple criteria, including because they are representative of the U.S. economy. They are generally large and important companies.

The index is market-cap weighted, so the largest companies have the most impact on the index's performance.

Image source: Getty Images.

It's a pretty clean design that has worked well over time. But the stocks in the index aren't selected because they are expected to go up or down. They are selected because they represent the U.S. economy.

It ends up being a broad mix. This is where the Vanguard S&P 500 Growth ETF comes in: It attempts to select growth-focused stocks from the S&P 500. (In case you were wondering, there is a value option, too: the Vanguard S&P 500 Value ETF.)

The Vanguard S&P 500 Growth ETF's methodology is a bit complex, but it looks at attributes like sales growth, earnings growth, and price momentum. That's exactly what you would expect from a growth-focused investment strategy. If that's what you want, this ETF is a good index-based option.

Data by YCharts.

Be careful what you wish for with ETFs

As the chart above highlights, the Vanguard Growth ETF has outperformed the Vanguard S&P 500 ETF. That's not particularly shocking, keeping in mind that the chart above only goes back to the late 2010 creation of Vanguard S&P 500 Growth ETF. That's about 15 years or so, which is a long time. But investment cycles on Wall Street can last a long time and then, very suddenly, change.

So what are you getting with the Vanguard S&P 500 Growth ETF today? The average price-to-earnings ratio (P/E) of the Vanguard S&P 500 ETF is 26.9, while the Vanguard Growth ETF has a P/E of 32.8. That's a material step up on the valuation front, suggesting that the stocks in the growth version are expensive right now.

The average price-to-book ratio (P/B) tells the same story. The Vanguard S&P 500 ETF has an average P/B ratio of 4.8 versus the growth ETF's 9. That's nearly twice the valuation.

Because one ETF owns growth stocks, these valuation differences make sense. But are they justified? The average return on equity (ROE) for these two indexes will help answer that question. ROE is a measure of a company's efficiency and profitability, and higher numbers are better. The Vanguard S&P 500 ETF's average ROE is 27%; the growth ETF's average is 28.3%. That's not a particularly large difference.

Data by YCharts.

If you measure by book value, you are paying nearly twice as much for 1.3 percentage points more ROE. If you are concerned that this is too high a premium, which is completely reasonable, you'll likely see the effect when the market swoons.

Notice in the chart above that the Vanguard S&P 500 Growth ETF is down around twice as much as the Vanguard S&P 500 ETF so far in 2025, largely thanks to the market correction that recently took place. It isn't unusual (and quite normal) for investors to dump the most expensive stocks when the market heads lower.

Know what you own

There's nothing inherently wrong with the Vanguard S&P 500 Growth ETF. It does exactly what it says it will, and that might be perfect for your investment approach.

But don't just blindly buy it because it has outperformed the S&P 500 index. Make sure you understand what it is doing and the risks it has taken on to achieve that result. If you don't make that extra effort, you might find you aren't prepared to stick with this ETF when market conditions eventually change. And that, in the end, could disrupt your long-term financial plans.