7 of the Best Growth Funds to Buy and Hold

Finding growth stocks involves more than just looking at which companies have performed well recently, a strategy more closely aligned with momentum investing.

Momentum investing focuses on stocks that have shown significant price increases over a certain period, betting that they will continue to climb, based on trends measured through technical indicators. However, while momentum stocks can overlap with growth stocks, they’re not synonymous.

Growth stocks are companies expected to increase their revenue, earnings or other key financial metrics at a rate faster than their industry sector or the overall market.

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“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, partner at Regency Wealth Management.

Therefore, investors interested in growth stocks typically monitor financial ratios that indicate a company’s potential for expansion, rather than traditional valuation metrics.

These include return on equity (ROE), a way to see how good a company is at making profits from the money shareholders have invested; operating margins, which show how well the company makes money from its main business before considering loans and taxes; and earnings per share (EPS) growth, which indicates if a company is increasing its profits over time.

For DIY investors, selecting growth stocks involves navigating a complex web of considerations, such as deciding which metrics to prioritize, setting benchmarks for these metrics (e.g., a minimum ROE of 10%), choosing the size of the companies to focus on (small-, mid- or large-cap), and selecting which sector or country’s stocks to include.

Growth mutual funds and exchange-traded funds, or ETFs, can greatly simplify this process by either following externally provided indexes with a clear methodology for selecting and weighting growth stocks, employing proprietary rules-based formulas, or relying on the expertise of a portfolio manager and research team to actively choose the most promising stocks.

Here are seven of the best growth funds to buy in 2024:

Fund Expense ratio
Vanguard Growth Index Fund Admiral Shares (ticker: VIGAX) 0.05%
Fidelity Blue Chip Growth Fund (FBGRX) 0.48%
SPDR Portfolio S&P 500 Growth ETF (SPYG) 0.04%
iShares Russell 1000 Growth ETF (IWF) 0.19%
Schwab U.S. Large-Cap Growth ETF (SCHG) 0.04%
Invesco S&P 500 GARP ETF (SPGP) 0.34%
Invesco NASDAQ 100 ETF (QQQM) 0.15%

Vanguard Growth Index Fund Admiral Shares (VIGAX)

VIGAX is a straightforward and low-cost mutual fund that offers investors exposure to over 200 domestic growth stocks at a 0.05% expense ratio. This fund tracks the CRSP U.S. Large Cap Growth Index, which screens potential holdings based on long- and short-term historical and projected EPS growth, historical growth in sales per share, and return on assets.

VIGAX’s current portfolio showcases impressive growth metrics, including a 19.6% earnings growth rate and 35.3% ROE. By weight, 55.8% of the fund is held in technology stocks, with mega-caps Microsoft Corp. (MSFT) and Apple Inc. (AAPL) together making up around 24% of it. VIGAX is also available as the Vanguard Growth ETF (VUG) for a lower 0.04% expense ratio.

Fidelity Blue Chip Growth Fund (FBGRX)

“For actively managed growth funds, a prospective investor should first look at the fund objective and description to understand if this fund is appropriate for their investing style and risk tolerance,” says Geoff Strotman, senior vice president, Alpha Research, at Segal Marco Advisors. “They should also understand the track record and experience of the firm and team managing the fund.”

A great example is FBGRX, which does not passively replicate an index. Since 1987, this mutual fund has actively picked what Fidelity believes to be the best blue-chip growth stocks, defined as companies which are “well-known, well-established and well-capitalized.” So far, this has worked, with FBGRX outperforming the Russell 1000 Growth Index since inception despite a high 0.48% expense ratio.

SPDR Portfolio S&P 500 Growth ETF (SPYG)

It’s important to remember that FBGRX’s outperformance of its benchmark index is a fairly rare occurrence. In reality, around 87.5% of all U.S. large-cap growth funds have underperformed the S&P 500 Growth Index over the trailing 15 years, according to the latest results from the S&P Indices Versus Active, or SPIVA, scorecard. A big factor contributing to this underperformance is higher fees.

Thus, long-term growth investors who want to make sure the odds are on their side may prefer a passive index ETF like SPYG. This ETF tracks the aforementioned S&P 500 Growth Index, which isolates the most growth-oriented stocks in the broader S&P 500 index based on sales growth, price-to-earnings ratios and momentum. It is also affordable, with a 0.04% expense ratio.

iShares Russell 1000 Growth ETF (IWF)

Similarly, while FGBRX has managed to historically outperform the Russell 1000 Growth Index, it doesn’t mean that other growth funds will. Therefore, investors who are concerned about FGBRX’s success being an example of survivorship bias can instead elect to passively track the Russell 1000 Growth Index via IWF, which charges a much lower 0.19% expense ratio.

This ETF is one of the most popular options on the market when it comes to large-cap growth stocks, having accumulated over $89 billion in assets under management, or AUM. Its portfolio of 440 stocks is extremely liquid with a low 0.01% 30-day median bid-ask spread. Finally, IWF makes for a highly efficient holding in a taxable brokerage account, as it has a low 0.5% 30-day SEC yield.

[5 Mega-Cap Stocks With Room to Run in 2024]

Schwab U.S. Large-Cap Growth ETF (SCHG)

“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. However, the opposite is also true. When interest rates rose at a fast pace throughout 2022, growth ETFs suffered high losses. Case in point, IWF experienced a 29.3% loss in 2022, before rebounding with a 42.5% gain the following year.

However, bad years for growth stocks can present a silver lining for opportunistic investors. For example, an investor could have sold IWF in 2022 to lock in a capital loss, while tax-loss harvesting into a different growth ETF like SCHG. Both ETFs track different indexes but have an 80% overlap in holdings. Moreover, SCHG is actually cheaper than IWF, charging just a 0.04% expense ratio.

Invesco S&P 500 GARP ETF (SPGP)

As popular as it is, the Russell 1000 Growth Index is not without its flaws. Namely, some experts criticize how its market-cap-weighted portfolio tends to be dominated by a handful of mega-cap stocks, many of which belong to the same sector. “The Russell 1000 Growth index has 42% of the portfolio in the technology sector and almost 24% weight in the two largest stocks in that sector,” Strotman says.

An alternative here is SPGP, which weights its holdings on other criteria beyond size. This ETF selects 75 stocks from the broader S&P 500 index based on growth and quality and value composite scores. Growth is calculated as three-year EPS and sales per share growth, while quality and value are calculated by financial leverage ratio, ROE and price to earnings. SPGP charges a 0.34% expense ratio.

Invesco NASDAQ 100 ETF (QQQM)

One of the most popular benchmarks aside from the Dow Jones Industrial Average and the S&P 500 is the Nasdaq-100 index. This index tracks the 100 largest non-financial companies listed on the Nasdaq exchange. Over the years, the composition of the Nasdaq-100 has become strongly tilted toward mega-cap growth stocks from the technology, communications and consumer discretionary sectors.

To track the Nasdaq-100, Invesco offers QQQM at a 0.15% expense ratio. This ETF’s top holdings currently include Microsoft, Apple, Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), both share classes of Alphabet Inc. (GOOG, GOOGL) and Tesla Inc. (TSLA). On average, the stocks in QQQM have a high ROE of 47.9% and are very tax-efficient with a 0.7% 30-day SEC yield.

[READ: 9 Best Growth Stocks for the Next 10 Years]

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7 of the Best Growth Funds to Buy and Hold originally appeared on usnews.com

Update 04/02/24: This story was previously published at an earlier date and has been updated with new information.

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