With a long-term approach, the right growth funds can help investors beat inflation.
One of the strongest-performing investment strategies of the last decade was to focus on growth stocks. These are shares of companies expected to generate higher revenues, earnings and cash flow compared to sector peers. As a result, their share prices can grow at a fast rate during favorable economic conditions, such as a low-interest-rate bull market. Despite high valuations in the form of elevated price-earnings, price-book and price-sales ratios, growth stocks often see strong price appreciation as investors buy them in anticipation of selling for more later down the line. Dividends are not a focus with growth stocks, as the companies prefer to reinvest excess cash into research and development, marketing, sales or acquisitions. While investors can buy growth stocks individually, a more diversified approach might be via a mutual fund or exchange-traded fund. Here are the seven best growth funds to buy and hold today.
Invesco NASDAQ 100 ETF (ticker: QQQM)
A popular passive indexing option for U.S. growth investors is the Nasdaq 100, which tracks the 101 largest nonfinancial stocks listed on the Nasdaq stock exchange. This index is heavily dominated by technology sector stocks at 50% of its weighting, with megacaps like Meta Platforms Inc. (META), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc. (GOOG, GOOGL) represented in its top holdings. Although subject to deep drawdowns, such as during the 2000 dot-com bubble and the 2008 financial crisis, the Nasdaq-100 index has rallied consistently to deliver strong bursts of outperformance, having returned an annualized 15.9% over the last 10 years. A great way to buy and hold the Nasdaq 100 long term is via QQQM, which costs a 0.15% expense ratio. That works out to $15 annually per $10,000 invested.
Vanguard Growth ETF (VUG)
Some investors might not like the Nasdaq 100 given that it excludes financial stocks and those not listed on the Nasdaq stock exchange. A more diversified option is VUG, which passively tracks the CRSP US Large Cap Growth Index. Like QQQM, VUG is also heavily tilted toward the technology sector at 49%, with Apple, Meta and Alphabet once again making an appearance in the top holdings. Other notable top holdings include Microsoft Corp. (MSFT), Tesla Inc. (TSLA) and Nvidia Corp. (NVDA). The ETF is a good holding for taxable accounts due to its minimal distributions. VUG is also cheaper than QQQM with an expense ratio of just 0.04%.
Fidelity Large Cap Growth Index Fund (FSPGX)
Investors who like the ability to automate contributions in any amount might prefer mutual funds over ETFs. Often, mutual funds are the only option for those investing in a company-sponsored 401(k) plan. A great option for growth investors is FSPGX, which tracks the Russell 1000 Growth Index. This mutual fund holds 524 large-cap U.S. stocks, with an overweight toward the technology sector at 44%. Compared to ETFs like QQQM, FSPGX offers higher diversification given its greater number of holdings, including financial sector stocks that QQQM excludes. In terms of fees, FSPGX charges a rock-bottom expense ratio of 0.035%.
Fidelity Growth Company Fund (FDGRX)
Investors who don’t mind actively managed funds can buy FDGRX instead of FSPGX. FDGRX is actively managed by Fidelity Management & Research Co., which buys U.S. and international stocks that it believes offer the potential for above-average growth based on earnings and revenue figures. The fund’s managers employ fundamental analysis of a company’s financial condition, industry position and general conditions in the market and economy to make their picks. The active management seems to have worked, with FDGRX returning 15.5% annualized over the trailing 10 years compared to the 13.4% posted by its benchmark, the Russell 3000 Growth index. However, the fund costs a high expense ratio of 0.79% due to the active management and greater turnover.
Vanguard Small-Cap Growth ETF (VBK)
Investing in growth stocks doesn’t mean limiting your search to large caps. Small-cap stocks, which trade with market caps of $300 million to $2 billion, can also fit the bill. When mixed together, you get small-cap growth, which is a highly risky yet potentially outperforming strategy, especially during low-interest-rate bull markets. A good way to passively invest in small-cap growth is via VBK, which tracks the CRSP US Small Cap Growth Index. This ETF holds 700 stocks with a higher-than-average earnings growth rate compared to the average small cap, but it also has higher volatility in the form of a greater historical standard deviation and beta, a measure of market sensitivity. VBK costs an expense ratio of 0.07%.
Vanguard Mega Cap Growth ETF (MGK)
Investors who want to invest in the largest U.S. growth stocks can consider targeting megacap stocks. These are companies with market caps of $200 billion or higher. A good option here is MGK, which tracks the CRSP US Mega Cap Growth Index. A good way to think about MGK is as a more concentrated version of VUG with just 102 stocks. MGK’s top 10 holdings are nearly identical to VUG’s, just with more weighting assigned to each. In fact, MGK’s top 10 holdings account for 60% of the ETF’s total weight. Technology stocks once again lead the way at over half of the ETF, with long-standing blue-chip consumer discretionary stocks like Home Depot Inc. (HD) making up a quarter of the ETF. MGK costs an expense ratio of 0.07%.
PIMCO StocksPlus Long Duration Fund (PSLDX)
PSLDX is a fund traditionally limited to institutional investors due to its complexity and risk. However, retail investors can access it depending on their brokerage. Despite not holding growth stocks per se, the fund has a track record of beating the S&P 500 and delivering above-average growth. PSLDX has achieved this by holding S&P 500 index derivatives and long-term bonds in balanced amounts. The embedded leverage in the derivatives gives the fund an overall 100/100 stock/bond ratio for 200%, or 2 times, leverage. The fund had historically beaten the pants off the S&P 500 until 2022. But it’s down 44% this year due to bonds falling alongside stocks amid rising interest rates. Still, for long-term growth investors, PSLDX could be a way of beating the market. The fund costs an expense ratio of 0.58% and is best held in a tax-advantaged account due to its high distributions.
7 best growth funds to buy and hold:
— Invesco NASDAQ 100 ETF (QQQM)
— Vanguard Growth ETF (VUG)
— Fidelity Large Cap Growth Index Fund (FSPGX)
— Fidelity Growth Company Fund (FDGRX)
— Vanguard Small-Cap Growth ETF (VBK)
— Vanguard Mega Cap Growth ETF (MGK)
— PIMCO StocksPLUS Long Duration Fund (PSLDX)
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Update 10/21/22: This story was published at an earlier date and has been updated with new information.