Just like there are different flavors of ice cream, there are also different flavors of stocks. Within the equity universe, investors are free to pick and choose from a variety of market caps, such as small-, mid- and large-cap stocks, as well as factors such as value, dividend, volatility or growth.
When it comes to driving U.S. market returns over the last decade, few factors have performed as well as growth has. Stocks exhibiting this factor have strongly outperformed, and they now sit at the top of many popular market indexes like the S&P 500 and Nasdaq 100.
Put simply, growth stocks are companies where earnings are expected to outpace the broader market. These types of companies typically reinvest earnings instead of paying dividends to investors, which allows them to further boost growth.
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Growth stocks can also be viewed as the opposite of value stocks, which are companies that trade at prices below what their fundamental valuations suggest.
“Since some growth stocks typically do not generate positive earnings until later in their business stage, metrics such as price-to-earnings, dividend yield and earnings yield tend to be less relevant,” says Mark Andraos, associate portfolio manager at Regency Wealth Management. “Many growth stock analysts tend to focus on annual revenue growth and price-to-sales as two key financial metrics, among others.”
Over many market cycles, growth stocks have historically seen periods of strong outperformance, but also periods of stagnant underperformance.
“Growth stocks have benefited greatly from a decade of near-zero interest rates, as they were able to issue debt at low rates to help fund their operations,” Andraos says. “When interest rates rose last year, growth stocks sold off as it became more expensive to borrow money, which coupled with already frothy valuations made them less attractive to investors.”
Another risk to watch out for is concentration risk, given the tendency of many growth stocks to come from high-flying sectors like information technology or communication services.
To access growth stocks, you can make use of both mutual funds and exchange-traded funds. Both of these investment vehicles can hold underlying portfolios of growth stocks, allowing you to easily diversify with a single fund.
Here’s a look at seven of the best growth mutual funds and ETFs on the market right now:
| Growth Fund | Expense Ratio |
| Vanguard Growth Index Fund Admiral Shares (ticker: VIGAX) | 0.05% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.76% |
| Schwab U.S. Large-Cap Growth Index Fund (SWLGX) | 0.035% |
| SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| iShares Russell 1000 Growth ETF (IWF) | 0.18% |
| Invesco NASDAQ 100 ETF (QQQM) | 0.15% |
| Invesco NASDAQ Next Gen 100 ETF (QQQJ) | 0.15% |
Vanguard Growth Index Fund Admiral Shares (ticker: VIGAX)
For cost-conscious investors, a Vanguard mutual fund like VIGAX offers a great combination of high diversification coupled with a low expense ratio, which can boost returns. By passively tracking the CRSP U.S. Large Cap Growth Index, VIGAX provides exposure to about 240 growth stocks for a 0.05% expense ratio, or $5 a year for a $10,000 investment.
Thanks to its passive indexing strategy, VIGAX also boasts a low portfolio turnover rate of 5%, a measure of how often a fund buys and sells stocks. A high turnover rate often means higher transaction costs and potential negative tax implications for investors. VIGAX is also a great pick for taxable accounts thanks to its low 30-day SEC yield of just 0.61%.
Fidelity Blue Chip Growth Fund (FBGRX)
For investors looking for the opportunity to outperform an index, an actively managed fund like FBGRX can make sense. Fidelity fund managers select stocks that in their view have above-average long-term growth potential. “Active funds are constantly reevaluating each stock and sector in their portfolio and dynamically adjusting their positions,” says Tim McCarthy, co-CEO and chairman at marketGOATS.
Since the fund’s inception on Dec. 31, 1987, FBGRX has managed to beat its benchmark, which is the Russell 1000 Growth Index. As of June 30, 2023, FBGRX has returned an annualized 12.4% since inception, compared to 11.2% for the index. Of course, there’s no guarantee that this outperformance will continue in the future. FBGRX is also fairly pricey with a 0.76% expense ratio.
Schwab U.S. Large-Cap Growth Index Fund (SWLGX)
“It’s always important to remember that an index fund is also a strategy, so mixing in different types of index funds can potentially give you more diversification,” McCarthy says. A great example here is SWLGX, which tracks the Russell 1000 Growth Index, making it slightly different from VIGAX. You can potentially alternate between the two as part of a tax-loss harvesting strategy.
The main appeal of SWLGX lies in its low expense ratio of 0.035%. For a $10,000 investment, this works out to $3.50 in annual fees. Like many Schwab funds, SWLGX also requires no minimum investment, making it accessible to investors with smaller accounts. However, SWLGX does have a higher portfolio turnover rate of 22.4%.
SPDR Portfolio S&P 500 Growth ETF (SPYG)
State Street Global Advisors offers a series of “portfolio” ETFs designed to be used as core portfolio building blocks. SPYG acts as the growth component in the company’s lineup by tracking the S&P 500 Growth Index, which isolates companies in the broader S&P 500 that display the strongest growth characteristics based on three main fundamental metrics.
Currently, SPYG’s index screens S&P 500 constituents for higher-than-average sales growth, price-to-earnings growth and momentum compared to their peers. As a result, the portfolio in SPYG consists of 234 stocks sporting an estimated three-to-five-year earnings per share, or EPS, growth rate of 13.2%. The ETF charges a 0.04% expense ratio.
iShares Russell 1000 Growth ETF (IWF)
For a broader approach to indexing growth stocks, you can opt for IWF, which tracks the popular Russell 1000 Growth Index. Compared to SPYG, IWF holds 444 stocks, with a slightly higher weighting toward mid-cap stocks. Like many growth funds, IWF sports the usual low 30-day SEC yield of 0.8% and a high 43% allocation to stocks from the technology sector.
Looking at IWF’s top holdings, you will find many familiar megacap stocks such as Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon Inc. (AMZN), Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA). This shouldn’t come as a surprise, given that many of these growth stocks have dominated U.S. market performance over the last few years. IWF charges a 0.18% expense ratio.
Invesco NASDAQ 100 ETF (QQQM)
Although not technically a growth stock index, the current composition and characteristics of the famous Nasdaq-100 index make it one in all but name. Composed of 100 of the largest non-financial stocks traded on the Nasdaq exchange, the Nasdaq-100 index has become popular as a proxy for U.S. megacap growth stock exposure, especially for ones hailing from the tech sector.
To track the Nasdaq-100, you can buy QQQM, which is the more affordable version of its larger and more liquid counterpart, the Invesco QQQ Trust (QQQ). QQQM charges a lower expense ratio of 0.15%, making it more suitable for buy-and-hold investors. Otherwise, it runs an identical portfolio, with 51% of the ETF held in technology sector stocks.
Invesco NASDAQ Next Gen 100 ETF (QQQJ)
A possible complement to QQQM is QQQJ, which can be thought of as the “junior” version of the former. This ETF tracks the Nasdaq Next Generation 100 Index, which invests in the 101-to-200 largest non-financial sector companies on the Nasdaq that haven’t yet qualified for inclusion in the bigger Nasdaq-100 index. Therefore, you can buy QQQJ for more small- and mid-cap exposure.
Compared to QQQM, QQQJ has a smaller allocation to technology sector stocks at 33% and a higher allocation to health care stocks at 23%. In terms of fees, QQQJ charges an identical expense ratio as QQQM of 0.15%.
[READ: 7 of the Best Fidelity Mutual Funds to Buy and Hold.]
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7 of the Best Growth Funds to Buy and Hold originally appeared on usnews.com
Update 07/05/23: This story was previously published at an earlier date and has been updated with new information.
