Investing in growth stocks can produce substantial returns for your portfolio. But picking individual stocks isn't for everyone.
Growth stocks are generally harder to evaluate because their valuations are largely based on their long-term potential, which creates significant uncertainty for investors. Investing in a growth ETF is a simple way to add exposure to growth stocks to your portfolio without having to study individual companies.
Top growth ETFs to consider
Many investors interested in growth stocks could benefit from investing in growth exchange-traded funds (ETFs). A growth ETF is a fund that will invest in a large basket of growth stocks. Here are six growth ETFs to consider.
Fund Name | Expense Ratio | Net Assets |
|---|---|---|
Vanguard Growth ETF (NYSEMKT:VUG) | 0.03% | $325 billion |
Vanguard Mega-Cap Growth ETF (NYSEMKT:MGK) | 0.05% | $27.9 billion |
iShares Russell Mid-Cap Growth ETF (NYSEMKT:IWP) | 0.23% | $18.7 billion |
Vanguard Small-Cap Growth ETF (NYSEMKT:VBK) | 0.05% | $39.8 billion |
iShares MSCI EAFE Growth ETF (NYSEMKT:EFG) | 0.34% | $13.9 billion |
ARK Innovation ETF (NYSEMKT:ARKK) | 0.75% | $6 billion |
1. Vanguard Growth ETF
NYSEMKT: VUG
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2. Vanguard Mega Cap Growth ETF
NYSEMKT: MGK
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NYSEMKT: IWP
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NYSEMKT: VBK
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The index's size, combined with the relative parity of its components, makes this small-cap growth ETF much more diversified than its peers investing in larger companies. Investors looking for more small caps should consider the Vanguard Small-Cap Growth ETF.
5. iShares MSCI EAFE Growth ETF
NYSEMKT: EFG
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NYSEMKT: ARKK
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How do growth ETFs work?
A growth ETF is a fund that invests in a portfolio of stocks. It's managed by a fund manager, and investors can buy shares of the fund via a stock exchange, just as they'd buy a regular stock.
The stocks in a growth ETF could be actively managed or passively managed. If actively managed, the fund manager is making decisions on which stocks to buy, sell, and hold in the fund's portfolio. If passively managed, the fund will track a benchmark index designed to represent growth stocks.
When an ETF experiences capital inflows or outflows, it relies on large financial institutions, called authorized participants, to create or redeem shares. They buy or sell the fund's individual components on the open market to ensure the right number of ETF shares is available.
Growth versus value ETFs
Growth ETFs can be much more volatile than value stock ETFs. Value stocks are generally more stable. Revenue and earnings are more predictable, and changes in outlooks don't move the stocks nearly as much. As a result, investors can expect a smoother ride from value ETFs than from growth ETFs.
Growth ETFs offer the possibility of outperformance in exchange for greater volatility, making them suitable for long-term investors willing to hold their shares for years.
Benefits and risks of investing in growth ETFs
There are quite a few benefits to buying a single growth ETF for your portfolio:
- They provide instant diversification across multiple businesses, reducing the risk relative to investing in just a handful of growth stocks.
- You gain exposure to the major growth trends without having to research or discover them yourself.
- The fees are relatively small, especially if you choose an index fund instead of an actively managed mutual fund.
There are some important risks to consider, though.
- Growth ETFs exhibit greater volatility than the overall market or value ETFs.
- You might not be as diversified as you think, since many growth ETFs are highly concentrated in specific sectors, such as technology.
- Some ETFs that don't fully replicate their index could exhibit greater tracking error than other indexes, leading to results that don't match the index they're meant to track.
How to choose a growth ETF
Before investing in a growth ETF, it's important to consider what type of growth stocks you want to own.
- Small-cap growth stocks have significant potential for massive gains but tend to underperform as a group.
- International growth stocks can provide portfolio exposure to innovative companies outside the U.S. but also carry additional risks.
- An actively managed growth fund has the potential to outperform the market, thanks to the insights of a smart investment manager, but could also end up on the other side of the coin.
Once you've determined what kind of growth stocks you want to own, you can select the one that best fits your criteria from the list above or develop your own list.
You can narrow down your selection based on the following factors:
- Fees and expenses. A low expense ratio could be a big differentiating factor.
- Tracking error. If you want returns that match the market, an ETF that closely tracks the benchmark index is key.
- Liquidity. If there's not enough liquidity in the market for the ETF, you may not be able to buy or sell shares quickly and at a fair price.
Related investing topics
FAQ
Growth ETFs FAQ
About the Author
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla, Vanguard Growth ETF, and Vanguard Index Funds - Vanguard Small-Cap Growth ETF. The Motley Fool has a disclosure policy.
