When it comes to investing strategies, few dichotomies are as pronounced as the one between value and growth.
Value investors look for stocks that appear to be trading below their intrinsic worth. They use financial ratios like price-to-earnings, price-to-book and price-to-sales to figure out if a stock is a good deal. In other words, these investors hunt for downtrodden companies that are priced lower than what their fundamentals suggest they should be.
On the opposite end, growth investors look for stocks that show potential for significant expansion. They try to find companies that are expected to grow their earnings at an above-average rate compared to other stocks in the market. To put it simply, they’re looking for businesses that are making more money each year, are expected to sell more than other companies and have potential to capture larger market shares in their industries.
“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.”
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While both value and growth strategies have had their moments in the spotlight, the past decade has especially smiled upon growth stocks. Several macroeconomic or big-picture factors have given them a boost. Advancements in technology, loose domestic monetary policy, the rise of digital economies and changing consumer habits are just a few of these tailwinds. These trends have made it easier for certain companies to grow faster than others.
“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.”
However, the analysis required to identify true growth potential can be time-intensive and complex. For many retail investors, diving deep into financial statements, market trends and future projections might seem daunting.
Enter growth funds, which provide a streamlined avenue for individual investors to gain exposure to a basket of growth stocks without having to pick each stock themselves.
For a relatively low fee, retail investors can essentially outsource the task of stock selection and portfolio management to seasoned professionals, ensuring they harness the potential of growth investing without getting lost in the minutiae.
Here are seven of the best growth mutual funds and exchange-traded funds, or ETFs, to buy in 2023:
| Fund | Expense ratio |
| Vanguard Growth Index Fund Admiral Shares (ticker: VIGAX) | 0.05% |
| Schwab U.S. Large-Cap Growth Index Fund (SWLGX) | 0.035% |
| Fidelity Large Cap Growth Index Fund (FSPGX) | 0.035% |
| SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| Invesco S&P 500 GARP ETF (SPGP) | 0.33% |
| Invesco QQQ Trust (QQQ) | 0.2% |
| Ark Innovation ETF (ARKK) | 0.75% |
Vanguard Growth Index Fund Admiral Shares (VIGAX)
VIGAX tracks the CRSP U.S. Large Cap Growth Index, which currently holds 234 large-cap U.S. companies screened for growth characteristics. In the aggregate, VIGAX’s portfolio shows a high return on equity of 33.6% and a high earnings growth rate of 23.1%. In simple terms, this means the companies in VIGAX are effectively using their money to generate profits and are seeing their earnings grow at a robust rate.
However, investors in VIGAX need to watch out for sector concentration risk. Currently, around 52% of the fund is held in technology stocks, with consumer discretionary coming in at 21%. The portfolio is also very top-heavy, with stocks like Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA) and both share classes of Alphabet Inc. (GOOGL, GOOG) holding significant weights.
Schwab U.S. Large-Cap Growth Index Fund (SWLGX)
For a low-cost alternative to VIGAX, consider SWLGX. This fund tracks the Russell 1000 Growth Index, which currently holds 447 stocks screened from the broader Russell 1000 index based on growth characteristics. SWLGX’s main allure is its low fees — with an expense ratio of 0.035%, a $10,000 investment is expected to incur just $3.50 in fees annually.
However, as with VIGAX, SWLGX’s portfolio is still fairly concentrated and top-heavy. Forty-three percent of the fund is technology, with 16% in consumer discretionary. Apple and Microsoft make up the top two holdings of the funds at a combined 23%, while Amazon and Nvidia bring up the third- and fourth-place spots at 5.6% and 5.3%, respectively. As a result, the performance of these sectors and companies can sway the fund.
Fidelity Large Cap Growth Index Fund (FSPGX)
Investors on Fidelity’s brokerage platform can buy FSPGX, which is the firm’s competitor to SWLGX. This fund also tracks the Russell 1000 Growth Index. It charges the same 0.035% expense ratio and can be purchased with no transaction fees or investment minimums on Fidelity’s platform. So far, the fund has attracted some $15.8 billion in assets under management, or AUM, since its inception in 2016.
FSPGX features virtually the same composition as SWLGX, with a 42% allocation to technology and a 16% allocation to consumer discretionary stocks, while sectors like materials and real estate are almost non-existent at less than 1% each. Again, the fund’s composition is concentrated, with the top 10 holdings accounting for 51% of its total portfolio weight as of Aug. 31.
SPDR Portfolio S&P 500 Growth ETF (SPYG)
State Street Global Advisors offers a series of “SPDR Portfolio” ETFs, which are designed to serve as low-cost core portfolio building blocks. The firm’s growth-oriented offering in this lineup is SPYG, which selects growth stocks from the broader S&P 500 index via the S&P 500 Growth Index. This index checks for stronger sales growth, earnings growth and momentum.
SPYG has been around since Sept. 25, 2000, and has accumulated about $18.7 billion in AUM to date. Its 237 current holdings largely hail from the technology and health care sectors at 36% and 17%, respectively, making it slightly less single-stock and sector-concentrated than its Russell 1000 counterparts. For example, Apple and Microsoft only make up about 20% of this ETF combined. SPYG charges a 0.04% expense ratio.
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Invesco S&P 500 GARP ETF (SPGP)
Some growth ETFs have portfolios concentrated in particular sectors or stocks due to how their indexes are constructed.
“The Russell 1000 Growth index, for example, has 43% of the portfolio in the technology sector and almost 23% weight in the two largest stocks in that sector,” says Geoff Strotman, senior vice president at Segal Marco Advisors. “As we saw in 2022, greater exposure to these high-momentum companies can cause outsized performance to the downside.”
Growth investors interested in a more balanced approach may like SPGP, which tracks the S&P 500 Growth at a Reasonable Price, or GARP, index. This index selects 75 stocks from the S&P 500 based on quantitative scores for growth, quality and value, and weights holdings based on their growth scores instead of market capitalization. The ETF charges a 0.33% expense ratio.
Invesco QQQ Trust (QQQ)
QQQ is one of the largest and most liquid ETFs in the industry today, with more than $198 billion in AUM and a 30-day average trading volume of 49 million shares. The ETF tracks the Nasdaq 100 Index, which holds the 100 largest non-financial-sector companies listed on the Nasdaq exchange. It charges a 0.2% expense ratio and offers an options chain for traders looking to hedge to speculate.
As of Sept. 28, the ETF holds a significant tilt to the technology sector at 57%, with consumer discretionary coming in second at 19%. Notable top holdings in QQQ include Apple, Microsoft, Amazon, Nvidia, both share classes of Alphabet, Tesla Inc. (TSLA) and Meta Platforms Inc. (META). The ETF also has a lower-priced version, the Invesco Nasdaq 100 ETF (QQQM), at a 0.15% expense ratio.
Ark Innovation ETF (ARKK)
Not all growth ETFs are passively managed by tracking a benchmark index. Some are actively managed, meaning that the fund manager selects stocks they believe will outperform. A good example is ARKK, managed by Cathie Wood. This ETF features a portfolio of companies involved in “disruptive innovation” themes like automation, robotics, AI, genomics and fintech for a 0.75% expense ratio.
However, the high fees and volatility of ARKK may not make it a suitable holding for all investors. “For actively managed ETFs, a prospective investor should first look at the fund objective and description to understand if this ETF is appropriate for their investing style and risk tolerance,” Strotman says. “They should also understand the track record and experience of the firm and team managing the ETF.”
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Update 10/03/23: This story was previously published at an earlier date and has been updated with new information.
