Growth ETFs (exchange-traded funds) are as straightforward as they sound: They are portfolios of growth stocks. However, not all funds are created equal and investors must perform due diligence in order to find the best growth ETFs to meet their goals.
By definition, a growth stock is any company with an above-average growth profile. In other words, these are companies whose revenues and earnings are expanding faster than the market average. They also often pay little or no dividends (but not always, as you'll read later), opting instead to reinvest their cash flow in the business to maintain their growth.
This is why owning growth ETFs makes so much sense. By diversifying your growth-stock holdings through a fund, you're protecting your downside.
Funds like these are extremely cheap, efficient vehicles that allow you to invest in dozens, if not hundreds, of growth stocks without having to trade them all individually in your account. They also allow you to be tactical, investing in sectors and industries you think are best positioned to rise going forward.
Investors abandoned growth stocks in 2022 due to higher interest rates and a threat of a recession. However, this corner of the market has regained popularity, with a prolonged downturn looking less likely by the day.
"So far, there's no evidence of a recession. So as long as there's no evidence of recession, I think the market will probably continue to melt up. People are chasing," Steven Eisman, senior portfolio manager at Neuberger Berman, recently told CNBC.
Despite the significant gains growth stocks have seen in 2023, many are still down or are flat from their 2021 highs. Translation: It's not too late to add growth to your portfolio. With that in mind, here are six of the best growth ETFs to add to a core portfolio for the long haul.
Data is as of September 19. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Invesco QQQ ETF
- Assets under management: $204.3 billion
- Dividend yield: 0.6%
- Expenses: 0.20%, or $20 annually for every $10,000 invested
Buying the Invesco QQQ ETF (QQQ, $369.87) is a focused bet on 100 of the most innovative companies trading on the Nasdaq stock exchange. While many of the best growth ETFs are heavy in technology stocks, QQQ is really loaded up at 57% of the portfolio. It also has large positions in consumer discretionary (19%) and healthcare stocks (7%), as well as smatterings of a few other sectors.
The ETF tracks the performance of the Nasdaq-100 Index. This is not only a collection of 100 of the most innovative Nasdaq stocks, but also 100 of the largest non-financial stocks trading on the exchange. Top QQQ stocks are Apple (AAPL) and Microsoft (MSFT), whose combined weightings account for more than 20% of the portfolio.
The QQQ got its start in March 1999. In October 2020, Invesco launched a slightly less costly version, the Invesco NASDAQ 100 Index Fund (QQQM). Still, the QQQ's average daily volume is more than double the QQQM. Traders buy the QQQ because of its liquidity advantage; QQQM suits buy-and-hold investors looking to save a little on fees. It charges 0.15%, 5 basis points less than its sister fund. (A basis point = 0.01%.)
"The resilience of QQQ is a testament to the strength of the NASDAQ-100 Index, and to the enduring partnership of Invesco and Nasdaq," said Sean Wasserman, vice president and head of Index and Advisory Services for Nasdaq, at the QQQM's launch in 2020.
Although most investors won't care about this detail, the QQQ has a different fund structure to the QQQM. The QQQ is a trust, which means it can't lend out its shares to short sellers to generate revenue to offset fees, but QQQM can. In addition, QQQ cannot reinvest dividends, a strategy popular with buy-and-hold investors.
Over the past decade, the QQQ has averaged an annualized total return (price change + dividends) of nearly 18% vs 12% for the SPDR S&P 500 ETF Trust (SPY), whose tech weighting is approximately half QQQ's.
Something to keep in mind before you decide to buy.
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Vanguard Growth ETF
- Assets under management: $93.0 billion
- Dividend yield: 0.6%
- Expenses: 0.04%
The Vanguard Growth ETF (VUG, $283.12) charges 0.04% annually, providing investors a low-cost option to invest in large-cap growth stocks. And at $93 billion in assets under management, it's one of the largest growth ETFs you can buy.
This fund tracks the performance of the CRSP US Large Cap Growth Index, which classifies growth stocks using six factors, including three-year historical growth in earnings per share and sales per share, as well as return on assets. The result is a diversified group of 235 large-cap growth stocks with a median market capitalization of $526.3 billion. In other words, the average VUG holding is a mega-cap stock.
Tech stocks account for more than half (52.0%) of the fund's total net assets, with consumer discretionary and industrial stocks the next highest sector weightings at 21% and 9%, respectively. VUG's top 10 holdings make up 53% of the fund's total net assets and are led by Apple, Microsoft and Amazon.com (AMZN).
The growth characteristics are apparent. The portfolio's typical stock has averaged 23% earnings growth over the past five years – and they're priced like it, trading at 36 times trailing-12-month profits and 8.9 times book value.
VUG, whose annual turnover is very low at 5%, has averaged an annualized total return of 13.8% over the past decade, 185 basis points higher than SPY. However, that lead has widened in 2023 amid a resurgent appetite for growth stocks.
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iShares S&P 500 Growth ETF
- Assets under management: $35.0 billion
- Dividend yield: 0.9%
- Expenses: 0.18%
There are two versions of this iShares ETF: the iShares S&P 500 Growth ETF (IVW, $70.92) and the iShares S&P 500 Value ETF (IVE). For the purpose of this list of the best growth ETFs to buy, we'll focus on IVW, which tracks the performance of the S&P 500 Growth Index, a collection of growth-oriented stocks in the S&P 500.
The growth characteristics used to select stocks for the sub-index include the three-year change in earnings per share divided by the price per share, the three-year sales-per-share growth rate, and the 12-month price change.
There are roughly 230 holdings in IVW with a median market cap of $373.5 billion, slightly lower than its large-cap growth peers but higher than its benchmark. Less than 10% are mid-cap stocks, with the rest large or giant caps.
The top three sectors by weighting in IVW are technology (35%), healthcare (17%) and consumer discretionary (11%). The top 10 holdings account for 45% of its $35 billion in net assets. IVW's reported turnover is 34%, which means it turns the entire portfolio once every three years.
Launched in May 2000, the iShares S&P 500 Growth ETF has averaged an annualized return of 6.86% since its inception. A $10,000 investment 23 years ago is currently worth nearly $43,000. A key reason for the healthy returns is the reasonable management fee of 0.18%.
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Global X Lithium & Battery Tech ETF
- Assets under management: $2.7 billion
- Dividend yield: 1.2%
- Expenses: 0.75%
The Global X Lithium & Battery Tech ETF (LIT, $56.95) boasts a four-star rating from Morningstar. The top-rated ETF tracks the performance of the Solactive Global Lithium Index, a collection of companies involved in the lithium cycle, from mining the mineral to producing lithium batteries for electric vehicles (EVs) and other uses.
LIT consists of 40 market cap-weighted stocks with a weighted average market cap of $79.4 billion. The average holding has a 2023 price-to-earnings ratio of 17.1 times, a 2023 price-to-book ratio of 2.9 times, and an average return on equity of 17.3%.
The four sectors that account for all 40 stocks in LIT are materials (40% weighting), consumer discretionary (27%), technology (16%) and industrials (16%). From a country perspective, the top three by weight are China (32%), the U.S. (28%) and Japan (13%). Global X even breaks the weightings by industry, with specialty chemicals, electrical products and motor vehicles each accounting for 19% of the portfolio.
The Global X Lithium & Battery Tech ETF is fairly top heavy, with the 10 largest holdings accounting for 56% of the ETF's $2.7 billion in net assets. Lithium stock Albemarle (ALB) is LIT's top holding, followed by EV stock Tesla (TSLA) and Japanese electronics manufacturer Panasonic Holdings (PCRFY).
LIT's inception was in July 2010. In the 13 years since, it's averaged a 7.3% annualized total return.
While its expenses are relatively high at 0.75%, the ETF provides easy access to a secular growth trend that's nowhere near ending.
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SPDR S&P 600 Small Cap Growth ETF
- Assets under management: $2.5 billion
- Dividend yield: 1.3%
- Expenses: 0.15%
If you're constructing a diversified portfolio of the best ETFs, including a small-cap fund in your holdings can't hurt. The SPDR S&P 600 Small Cap Growth ETF (SLYG, $74.78) is one noteworthy option.
Launched in September 2000, SLYG has grown to $2.5 billion – a healthy size, though much smaller than the more widely known iShares Russell 2000 ETF (IWM), which has roughly $50 billion in net assets. IWM tracks the performance of the Russell 2000 Index, a float-adjusted cap-weighted index that's a subset of the Russell 3000 Index. The Russell 2000 represents the smallest 2,018 stocks in the Russell 3000, 96% of the investable U.S. equity market.
SLYG, on the other hand, tracks the performance of the S&P Small Cap 600 Growth Index, a collection of stocks found within the S&P Small Cap 600 Index that exhibit the most robust growth characteristics, including sales growth, earnings change relative to price and momentum.
The average SLYG holding has a weighted average market cap of $3.0 billion, three to five year earnings per share growth of 11%, and is valued at 14 times earnings.
SLYG's top three sectors by weight are industrials (18%), technology (18%) and financials (16%). Its top 10 holdings account for just 12% of the portfolio, so no one stock overly influences the fund's performance. The biggest holdings at present include energy stock Civitas Resources (CIVI) and engineering firm Comfort Systems (FIX). The fund is reconstituted and rebalanced once a year on the third Friday in December.
Because the SPDR S&P 600 Small Cap Growth ETF only rebalances once a year, it can keep expenses low at 0.15%. It has an annual total return of 6.4% since inception.
Learn more about SLYG at the State Street Global Advisors provider site.
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WisdomTree International Hedged Quality Dividend Growth Fund
- Assets under management: $1.7 billion
- Dividend yield: 2.4%
- Expenses: 0.58%
If you're a dividend investor, the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG, $39.56) is an excellent way to invest outside the domestic U.S. markets.
As the name suggests, it is an international ETF whose holdings are based outside the U.S. and Canada. It is also dividend-focused and hedged to minimize the currency fluctuations between the U.S. dollar and foreign currencies.
The fund tracks the performance of the WisdomTree International Hedged Quality Dividend Growth Index. The index starts with the top 300 companies from the WisdomTree International Index based on growth and quality factors. The holdings are then weighted as a result of the annual cash dividends paid. So, if company A paid $1 a share, and company B paid $2, company B would get a higher weighting.
Its top three countries by weight are Switzerland (18%), the United Kingdom (17%) and France (13%). Hong Kong is in the 11th-largest position, while there is no exposure to mainland China.
IHDG's dividend yield is a healthy 2.4% vs 1.5% for the S&P 500. The fund launched in May 2014, and a $10,000 investment at inception is worth nearly $22,000. Even with mediocre performance from European stocks in recent years, this top growth ETF has averaged an average annual return of nearly 9% over the past five years.
A significant dividend helped immensely. So too, did the hedging.
Tthe WisdomTree International Hedged Quality Dividend Growth Fund currently has about 260 holdings, with the largest – luxury stock LVMH (LVMUY) – accounting for 6% of the $1.7 billion in net assets, while the smallest holding – Tokyo utility stock eRex (ERXCF) – a minimal investment. The top 10 holdings account for about 40% of the fund's net assets.
The top three sectors by weight are consumer discretionary (20%), healthcare (20%) and consumer staples (19%).
Learn more about IHDG at the WisdomTree provider site.
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