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
Key Data Points
The Vanguard Growth ETF (VUG +1.24%) is a large-cap growth stock ETF. The fund aims to replicate the CRSP US Large Cap Growth index, which constitutes half of the CRSP US Large Cap index.
The latter, the CRSP US Large Cap index, comprises the top 85% of U.S. stocks weighted by market capitalization, including companies with market caps as small as $5 billion. So, while the index is primarily made up of large-cap stocks, it also includes some mid-cap stocks.
While weighting the fund by market capitalization keeps fees and asset turnover low, it results in heavy allocations to the market's largest companies. The three largest holdings account for more than a third of the portfolio. Likewise, almost two-thirds of the portfolio is invested in technology companies.
With an expense ratio of just 0.03%, the Vanguard Growth ETF is one of the most efficient ways to add growth stock exposure to your portfolio.
2. Vanguard Mega Cap Growth ETF
NYSEMKT: MGK
Key Data Points
For those who believe the big winners will keep winning, the Vanguard Mega Cap Growth ETF (MGK +1.25%) may be a good option to add growth stocks to your portfolio. The ETF tracks the CRSP US Mega Cap Growth index, which is based on the CRSP US Mega Cap index. The latter collects stocks with market capitalizations in the top 70%.
The smaller stock universe means the Vanguard Mega Cap Growth ETF is even more concentrated in the biggest names in the stock market. The top 10 holdings account for roughly two-thirds of the portfolio.
It's even more heavily weighted toward technology growth stocks than the Vanguard Growth ETF. Despite the smaller index, Vanguard manages to keep its asset turnover roughly the same as the Vanguard Growth ETF. If you'd like greater exposure to the market's biggest growth stocks, the Vanguard Mega Cap Growth ETF has an expense ratio of 0.05%.
3. iShares Russell Mid-Cap Growth ETF
NYSEMKT: VBK
Key Data Points
Small-cap growth stocks offer the biggest potential for capital appreciation. Since they're small companies, it takes relatively little increased buying interest to move the stocks significantly higher. The Vanguard Small-Cap Growth ETF (VBK +0.91%) offers a simple way to gain exposure to this sector without having to dig for individual stocks.
The ETF tracks the CRSP US Small Cap Growth index, which selects the top 50% of stocks with the best earnings growth outlooks and strong returns on assets from the universe of stocks in the second through 15th market-cap percentiles.
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
Key Data Points
Some of the biggest growth opportunities are in international markets. The iShares MSCI EAFE Growth ETF (EFG +0.12%) provides exposure to growth stocks in developed markets around the world.
The ETF tracks the MSCI EAFE Growth index, which includes large- and mid-cap companies from developed markets outside the U.S. and Canada. The stocks are filtered based on earnings growth history and outlook.
The ETF is more diversified than its U.S. large-cap growth counterparts. A little more than 20% of the portfolio is invested in the top 10 holdings. The index includes companies from Japan, the U.K., France, Switzerland, Germany, and others. If you're looking for additional international stock exposure in your portfolio, the iShares MSCI EAFE Growth ETF is a great option.
6. ARK Innovation ETF
NYSEMKT: ARKK
Key Data Points
The ARK Innovation ETF (ARKK +1.65%) is an actively managed fund that invests in companies producing what it deems "disruptive innovation." The team defines the term as "the introduction of a technologically enabled new product or service that potentially changes the way the world works."
It invests across industries, including biotechnology, automotive, energy, information technology, and finance. Although it maintains a global outlook, it's heavily concentrated in the U.S., with more than 90% of its portfolio invested in North American companies.
More than 50% of the ETF's portfolio remains invested in its top 10 holdings since fund manager Cathie Wood often lets her winners run and isn't afraid to bet big on her highest-conviction stock picks. For example, Tesla (TSLA +3.53%) has long been its largest holding, accounting for about 10% of the portfolio.
As an actively managed ETF, the ARK Innovation ETF has a relatively high expense ratio of 0.75%. However, if you believe in Cathie Wood and her team's investment strategy, their ability to identify the most innovative companies, and their ability to manage a portfolio for optimal long-term growth, it's worth the price.
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.
