There are many good things about being in your 20s, and one of them is that you have a long time horizon until retirement. That means you have time on your side, giving you the ability to withstand short-term market fluctuations to attain long-term returns. That, in turn, means you can be more aggressive with your investments, as growth stocks have generally outperformed value stocks over time.
Exchange-traded funds, or ETFs, are baskets of stocks pooled together in a single fund that is traded on major stock exchanges. Each share represents a stake in the ETF's total assets, and they generally track to a benchmark or sector. They offer lower expense ratios than a typical actively managed mutual fund, too. Bottom line: ETFs are a great way to invest in growth stocks. Here are 3 of the best ETFs for investors in their 20s.
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1. Fidelity MSCI Information Technology Index ETF
The information technology sector has been the stellar performer throughout this COVID-19 recession as businesses and people sheltering at home have relied on technology more than ever in this time of social distancing. There are several excellent ETFs in the technology sector but none better than the Fidelity MSCI Information Technology Index ETF (FTEC -0.60%). This ETF is based on the MSCI USA Investable Market Index Information Technology, which tracks large-, mid- and small- cap IT companies. The ETF has 322 holdings including Apple (19.5%) and Microsoft (17.5%) -- the two largest holdings by far.
This is the cheapest ETF in the technology sector with an expense ratio of just 0.08%, lower than the Vanguard Information Technology ETF (0.10%) and the Technology Select SPDR Sector ETF (0.13%). It has also had comparable performance to those two competitors (both of which, by the way, would also be good adds to the portfolio). For the year, the Fidelity ETF is up 17.3% with a 1-year return of 29.6%. Over the past 5 years, it has had a total return of 175%, which is far better than the S&P 500's 52.9% and the IT sector's 154%.
The technology sector has indeed driven the stocks market gains over the past decade -- and there's little chance of it slowing down over the next 10 years as society continues its digital transformation. The pandemic, through social distancing, has accelerated the growth of the digital economy and will lead to more businesses adopting work-from-home strategies, which will increase the need for IT. There are also emerging technologies like 5G, Internet of Things, artificial intelligence, among others, that will change the way we live and work. These factors will all drive the IT sector through the next decade.
2. Vanguard Russell 1000 Growth ETF
The Vanguard Russell 1000 Growth ETF (VONG -1.38%) tracks to the Russell 1000 Growth Index, which focuses on the largest growth companies in the Russell 1000. The ETF has 438 holdings with 45% of the assets in the top 10 positions. Some of the largest holdings are Apple (9.9%), Microsoft (9.9%), and Amazon (8.4%). It is slightly more overweighted in technology versus the Russell 1000 Growth Index and underweight in producer durables and financials.
Among large-cap growth ETFs, it is one of the top performers. Year-to-date, it is up 15.6%, slightly ahead of the iShares Russell 1000 Growth ETF, which is up 15.5%. For the past year, it has returned 24.7%, slightly better than its iShares competitor, which is up 23.8%. Over the past 5 years, it has had a total return of 114.5%, compared to the iShares' total return of 113.4%. It also has a better 5-year return than the Schwab U.S. Large-Cap Growth ETF, the Vanguard Growth ETF, and the SPDR Portfolio S&P 500 Growth ETF.
Aside from the return, what sets this ETF apart is its low expense ratio of just 0.08%, which is well below the average ETF expense ratio of 0.54%.
Currently 45% of the holdings are in the technology sector, which should continue drive returns for the next 10 years, as outlined above. While growth stocks are subject to more short-term volatility, which long-term investors should ignore, this ETF is well-diversified across large-cap companies, which should allow it to better navigate the troughs.
3. Nuveen ESG Mid-Cap Growth ETF
The Nuveen ESG Mid-Cap Growth ETF (NUMG -1.67%) is one of the newer kids on the block, launched on Dec. 16, 2016. But it has made a name for itself already. The fund tracks the TIAA ESG USA Mid-Cap Growth Index and invests in just 58 stocks. No holding is more than 3% of assets, so it is highly diversified with only 37% in the 15 largest holdings. It is made up of mid-cap growth companies that meet certain environmental, social and governance (ESG) criteria. The largest holdings are Splunk, Twilio, and Align Technology.
ESG investing is one of the fastest growing segments of the market, particularly among younger investors, as millennial and Gen Z investors favor investments in companies that are socially conscious. With governments and companies worldwide moving toward reducing and eliminating carbon emissions, ESG companies driving sustainability should thrive. And a post-pandemic world should lead to more corporate and government accountability.
The ETF has been a strong performer, too, up about 17.9% year to date and 21.6% over the past 12 months. It doesn't yet have a 5-year track record but has a total return of 59.8% over the past 3 years. Given the expected growth of ESG investing, this would be a great ETF for twenty-something investors.
These 3 ETFs all have aggressive growth profiles and may fluctuate depending on market conditions, but over time, which is on your side, they should deliver excellent returns.
