Stock investors typically classify themselves into one of two categories: value or growth investors. Each of these camps has distinct preferences and philosophies when it comes to picking stocks.
The former hunt for undervalued companies, often in stodgy industries like industrials or consumer staples. Their goal is to find a stock priced unfairly by the market and trading lower than its intrinsic value. To that end, they often rely on metrics such as price-to-book, price-to-earnings and dividend yield ratios to identify potential bargains.
In contrast, growth investors focus on companies projected to grow at an above-average rate, predominantly in more attention-grabbing areas like the technology and consumer discretionary sectors. Key indicators for them include earnings growth rate, return on equity and revenue growth.
“While earnings may remain positive, the risk associated with growth stocks is overpaying for future growth,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. “This contrasts with value stocks, where the primary risk is stepping into a distressed situation that does not improve.”
Although growth investing has performed well over the past decade, it doesn’t guarantee success for every growth stock picker. The practical challenges of managing a growth stock portfolio are many: continuous rebalancing, commissions on trades and the task of tracking quarterly earnings for multiple companies. All of these can eat into an investor’s long-term expected returns.
Furthermore, individual growth stock picks come with idiosyncratic, or company-specific risks. Consider how popular COVID-era growth stocks like Zoom Video Communications Inc. (ticker: ZM) and Peloton Interactive Inc. (PTON) soared during the pandemic, but fell sharply once the macroeconomic environment shifted against their business models.
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“In the case of growth stocks, we would argue that higher interest rates will have a disproportionate impact on less profitable growth companies, while companies that have consistently grown sales and delivered that to shareholders through earnings that exceed the cost of rising rates will be rewarded,” Grossman says. “Thus, we think getting high sustainable growth is the most important thing to do.”
For those looking for a more hands-off approach, exchange-traded funds, or ETFs, offer a solution. These funds provide an avenue to growth investing without the intricacies of individual stock selection. By opting for a growth ETF, investors get the benefits of diversification, transparency and liquidity, all while investing in the broader concept of growth investing rather than specific stock picks.
“For example, in 2022, an equal-weight portfolio of the top growth stocks such as Meta Platforms Inc. (META), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), Alphabet Inc. (GOOG, GOOGL) and Microsoft Corp. (MSFT) was down a combined 45.3%, while the Russell 1000 Growth ETF (IWF) was down only 29.3%,” says Geoff Strotman, senior vice president at investment consultancy Segal Marco Advisors. “This was due to the diversification that came with holding a portfolio with over 500 different growth stocks.”
Here are seven of the best growth ETFs to buy today:
| ETF | Expense Ratio |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% |
| Vanguard Russell 1000 Growth ETF (VONG) | 0.08% |
| iShares MSCI USA Momentum Factor ETF (MTUM) | 0.15% |
| SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| Invesco QQQ Trust (QQQ) | 0.20% |
| iShares MSCI USA Quality Factor ETF (QUAL) | 0.15% |
| iShares MSCI EAFE Growth ETF (EFG) | 0.36% |
Schwab U.S. Large-Cap Growth ETF (SCHG)
Some of the most popular growth ETFs are passively managed, meaning that they attempt to replicate the holdings of a benchmark index. Unlike active ETFs, passive growth ETFs do not engage in stock picking to try and beat the market. Their benefits include low turnover, decent tax efficiency and low tracking error, referring to the degree their returns differ from their index benchmark.
“For a passively managed growth ETF, the most important factor is fees,” Strotman says. A great example is SCHG, which tracks 254 growth stocks represented by the Dow Jones U.S. Large-Cap Growth Total Stock Market Index for a 0.04% expense ratio. This means that for every $10,000 invested in SCHG, investors can expect to pay $4 annually in fees. The ETF also has a low 5.1% turnover rate.
Vanguard Russell 1000 Growth ETF (VONG)
Another popular index for tracking U.S. growth stocks is the Russell 1000 Growth Index. “Russell indexes employ a multi-variable approach using metrics such as book-to-price, medium-term growth forecasts and historical sales per share growth to determine if a company is part of the growth constituency,” says Greg Lucente, investment research analyst and team lead at GYL Financial Synergies.
For affordable exposure to the Russell 1000 Growth Index, Vanguard offers VONG at a 0.08% expense ratio. However, investors should be aware of concentration risk. “VONG now has north of 50% of its assets within the top 10 holdings, driven largely by Apple and Microsoft combined for a 23% weight,” Lucente says. However, the ETF is very tax-efficient, with a low 0.7% 30-day SEC yield.
iShares MSCI USA Momentum Factor ETF (MTUM)
Another method to tap into growth stocks is via the momentum factor. This is based on the idea of capitalizing on existing market trends, buying stocks that have performed well recently and selling those that haven’t. “The growth index ETFs are already heavily exposed to momentum in markets,” Strotman says. “Thus, stocks that have done the best recently have increasingly higher weights.”
For exposure to growth stocks with an explicit momentum focus, consider MTUM. This ETF follows a rules-based system designed to buy winners and sell losers in an attempt to capitalize further on gains and cut losses early. The top holdings in this ETF currently include Nvidia Corp. (NVDA), Meta Platforms and Microsoft. MTUM charges a 0.15% expense ratio.
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SPDR Portfolio S&P 500 Growth ETF (SPYG)
“If pursuing a passive-oriented ETF, cost still remains a core consideration in selection as it minimizes the tracking error the fund will have to its index,” Lucente says. For a growth ETF that undercuts VONG in terms of fees, investors can buy SPYG. “As the name implies, it tracks the S&P 500 Growth Index and has one of the lowest expenses in the category at 0.04%,” Lucente says.
SPYG’s index sifts out the most growth-oriented stocks from the broader S&P 500 by assessing three metrics: sales growth, earnings-change-to-price ratio and momentum. The result is a portfolio of 238 current holdings largely weighted to the technology sector at around 35%, with names like Apple, Microsoft, Nvidia and Alphabet sitting in the top five holdings.
Invesco QQQ Trust (QQQ)
Another indirect way to target growth stocks is via QQQ, which tracks the Nasdaq-100 index. “Over the last 10 years, the Nasdaq-100 has strongly outperformed the S&P 500, largely thanks to the outperformance of Meta Platforms, Apple, Netflix, Microsoft and Amazon,” says Ryan McCormack, senior factor and core ETF strategist at Invesco. QQQ charges a 0.2% expense ratio and is a great option for active traders due to its high daily volume and options chain.
Investors looking for a lower-cost buy-and-hold name can use QQQ’s cheaper cousin, the Invesco NASDAQ 100 ETF (QQQM), at 0.15%. “QQQM was launched in October 2020, and while it tracks the same index as QQQ, the ETF’s 25% lower expense ratio and structural advantages such as securities lending and dividend reinvestment at the fund level make it a better choice for investors looking for long-term Nasdaq-100 exposure,” McCormack says.
iShares MSCI USA Quality Factor ETF (QUAL)
“Another more tempered approach to access growth ETFs is to target certain factors that are typically associated with growth companies, with one of these factors being the quality factor,” Lucente says. “It emphasizes metrics such as return on equity, debt-to-equity and earnings variability, which can frequently be found in more growth-oriented companies.”
The MSCI USA Sector Neutral Quality Index tracked by QUAL screens for high return on equity, stable annual earnings growth and the low use of leverage. “QUAL charges a competitive fee of 0.15% while maintaining 40% of its weight in its top 10 holdings, with Nvidia, Meta, Visa Inc. (V), Microsoft and Apple” rounding out the top five, Lucente says.
iShares MSCI EAFE Growth ETF (EFG)
Growth stocks aren’t just a U.S. phenomenon. Investors interested in adding an element of global diversification to their portfolio can use an ETF like EFG for exposure. This ETF tracks the iShares MSCI EAFE Growth ETF, which tracks growth stocks from international developed countries outside of the U.S. and Canada, such as Japan, France, Switzerland, the U.K., Australia, Germany and more.
Compared to U.S. growth ETFs, EFG has a much different sector composition, with greater industrials, health care and consumer discretionary exposure. Notable companies like Nestle SA (NESN), ASML Holding NV (ASML), LVMH (MC.PA) and AstraZeneca PLC (AZN) sit in this ETF’s top holdings. However, the international exposure results in a somewhat higher 0.36% expense ratio.
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7 Best Growth ETFs to Buy Now originally appeared on usnews.com
Update 11/03/23: This story was previously published at an earlier date and has been updated with new information.
