What exactly drives a company’s stock price higher? Intuitively, it’s investor demand, but dig deeper — why are investors flocking to buy certain stocks beyond just fear of missing out?
To understand this, visualize owning a share as having a tangible claim on a company’s future earnings. As those earnings grow, so should the value of your shares. It’s logical that companies which grow earnings faster than their peers or the broader market will see their stock prices increase accordingly.
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Consider the early days of companies like Palantir Technologies Inc. (ticker: PLTR), Tesla Inc. (TSLA) and Amazon.com Inc. (AMZN), which despite a lack of positive earnings, showed rapid revenue growth and margin expansion. Investors who recognized and bet on these traits in the companies’ formative years would have seen substantial returns as these firms matured into the titans they are today.
“Since some growth stocks typically do not generate positive earnings until later in their business stage, metrics such as price-earnings, dividend yield and earnings yield tend to be less relevant,” says Mark Andraos, partner at Regency Wealth Management.
This is the essence of growth investing: identifying companies with strong potential to see an increase in the amount investors are willing to pay per dollar of earnings. Over the last decade, growth stocks have outperformed their value counterparts due to favorable economic tailwinds.
“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.
Fortunately, the investment landscape has evolved to include numerous mutual funds and exchange-traded funds (ETFs) that simplify this task. Whether through an index-based strategy or active management, growth funds provide a systematic and automated way to invest.
Here are seven of the best growth funds to buy in 2024:
| Fund | Expense ratio |
| Vanguard Growth ETF (VUG) | 0.04% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.47% |
| iShares Russell 1000 Growth ETF (IWF) | 0.19% |
| Fidelity Contrafund (FCNTX) | 0.39% |
| Invesco Nasdaq 100 ETF (QQQM) | 0.15% |
| Invesco S&P 500 GARP ETF (SPGP) | 0.36% |
| Pacer U.S. Cash Cows Growth ETF (BUL) | 0.60% |
Vanguard Growth ETF (VUG)
One of the most cost-effective ways to become a growth investor is by buying VUG. This Vanguard ETF charges a cheap 0.04% expense ratio to track the CRSP U.S. Large Cap Growth Index, which holds a market-cap-weighted portfolio of 188 holdings screened for growth characteristics. On average, the companies inside VUG exhibit a return on equity (ROE) of 42% and an earnings growth rate of 24.4%.
VUG’s portfolio isn’t very diversified, though, with a heavy tilt toward the technology sector at 59.4%. It is also top-heavy, with the three largest holdings, Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA), accounting for roughly 36% of the ETF’s weight. However, this ETF is tax efficient, with a low 5.3% turnover rate and a minimal 0.5% 30-day SEC yield.
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 has been around since 1987. This ETF focuses on growth stocks that have blue-chip status, which Fidelity defines as “well-known, well-established and well-capitalized.” Over the trailing 10-, five-, three- and one-year periods, FBGRX has outperformed its benchmark, the Russell 1000 Growth Index. The fund charges a 0.47% expense ratio with no minimum required investment.
iShares Russell 1000 Growth ETF (IWF)
The Russell 1000 Growth Index is a market-capitalization-weighted benchmark comprising large- and mid-cap companies selected based on higher price-to-book ratios, medium-term forecasted growth and historical growth in sales per share over the past five years. This index provides an unbiased and objective way to identify companies with strong growth potential.
As a result, it’s common to see actively managed growth funds benchmarked to the Russell 1000 Growth Index, as opposed to a broad market index like the S&P 500. If you believe in passive indexing outperforming active management over the long term, then IWF might be a suitable holding. This ETF charges a 0.19% expense ratio and has a five-star rating from Morningstar.
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Fidelity Contrafund (FCNTX)
Despite its popularity, not all experts like the Russell 1000’s construction, largely due to concentration risk. “The Russell 1000 Growth Index has 49% of the portfolio in the technology sector and almost 24% weight in the two largest stocks in that sector,” Strotman says. A far more balanced growth fund to consider is FCNTX, which originally started out as a contrarian-styled fund.
FCNTX’s current portfolio only features a 24.9% allocation to technology, which is actually underweighted compared to the S&P 500 at 8.8%. Managed by William Danoff since 1990, FCNTX has consistently managed to outperform both the S&P 500 and the Morningstar “Large Growth” peer category. The fund currently charges a 0.39% expense ratio.
Invesco Nasdaq 100 ETF (QQQM)
“QQQM provides access to the 100 largest non-financial companies listed on the Nasdaq exchange,” says Nick Kalivas, head of factor and core equity ETF strategy at Invesco. Thanks to the Nasdaq exchange’s higher-than-average listing of innovative technology, consumer discretionary and communication sector stocks, QQQM has been categorized as a “Large Growth” fund for some time now.
Currently, investors who buy QQQM can get exposure to all of the “Magnificent Seven” stocks in its top holdings — Apple, Nvidia, Microsoft, Meta Platforms Inc. (META), Amazon, Tesla and Alphabet Inc. (GOOG, GOOGL). It charges a 0.15% expense ratio and is tax efficient, with a low 0.6% 30-day SEC yield. For active traders, QQQM also has a counterpart, the Invesco QQQ Trust (QQQ), with an options chain.
Invesco S&P 500 GARP ETF (SPGP)
One of the main risks with growth stocks is that investors could potentially overpay at high valuations, heightening the risk of diminished returns down the line. To alleviate this, you can implement a “growth at a reasonable price,” or GARP strategy. To put this in play, consider SPGP, which tracks the 77 companies represented by the S&P 500 Growth at a Reasonable Price Index at a 0.36% expense ratio.
“SPGP offers a differentiated return and risk profile from traditional growth funds, which are agnostic to a company’s quality characteristics and avoid focusing on valuation measures,” Kalivas says. The benchmark tracked by SPGP screens for quality and value characteristics based on three-year earnings-per-share and sales-per-share growth, financial leverage, return on equity and price-to-earnings ratios.
Pacer U.S. Cash Cows Growth ETF (BUL)
An alternative to the GARP strategy is to opt for a focus on free cash flow yield. This metric takes the cash remaining after a company pays expenses, interest, and taxes and makes long-term investments, and divides that by the company’s enterprise value, which adjusts market capitalization to account for debt and cash on the balance sheet. This metric is crucial because it tempers growth investing with an emphasis on paying fair value.
BUL utilizes this approach by starting with the S&P 900 Pure Growth Index. Then, the ETF isolates the top 50 companies with the highest free cash flow yield and weights them by market capitalization. According to Pacer, this process results in an average free cash flow yield of 5.5% and price-to-earnings ratio of 17.2 for BUL, versus 3.6% and 34.5 for the S&P 900 Pure Growth Index. BUL charges a 0.6% expense ratio.
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7 of the Best Growth Funds to Buy and Hold originally appeared on usnews.com
Update 10/18/24: This story was previously published at an earlier date and has been updated with new information.
