Economic uncertainty has hammered the stock market this year, but growth stocks have been hit especially hard. The Federal Reserve is raising interest rates at the fastest pace in four decades to rein in runaway inflation. Increasing the cost of borrowing will ultimately lower demand for goods and services, meaning corporate growth will likely slow in the near term. That prognosis is bad for the stock market in general, but it's especially grim news for growth stocks as their valuations often depend on how quickly metrics like revenue and free cash flow are growing.
For that reason, the S&P 500 Growth index and the tech-heavy Nasdaq Composite have plunged 28% and 30% year to date, respectively, putting both indexes deep in bear market territory. But those losses create a fantastic buying opportunity. Both indexes have recovered from every past downturn, and despite falling sharply this year, both indexes have outperformed the S&P 500 over the past five-year, 10-year, and 20-year periods.
For that reason, now is a great time for investors to buy index funds that track the S&P 500 Growth index and the Nasdaq Composite.
1. The Vanguard S&P 500 Growth ETF
The Vanguard S&P 500 Growth ETF (VOOG 1.65%) tracks the S&P 500 Growth index, which itself measures the performance of growth stocks in the S&P 500. The Vanguard ETF includes 242 companies, mostly large-cap growth stocks, that span all 11 stock market sectors. That said, the ETF is heavily weighted toward just three sectors: information technology (43.8%), consumer discretionary (15.9%), and healthcare (12.8%).
The top 10 holdings in the Vanguard S&P 500 Growth ETF are as follows:
- Apple: 15.1%
- Microsoft: 11.3%
- Amazon: 5.9%
- Tesla: 4%
- Alphabet (Class A shares): 3.7%
- Alphabet (Class C shares): 3.3%
- Nvidia: 2.2%
- Eli Lilly & Co: 1.9%
- Home Depot: 1.5%
- UnitedHealth Group: 1.4%
Over the last two decades, the S&P 500 index has generated a total return of 542%, but the S&P 500 Growth index has generated a total return of 605%, equivalent to an 10.3% average annual gain. At that pace, $150 invested weekly in the Vanguard S&P 500 Growth ETF would be worth more than $1.4 million in 30 years.
The last item worth mentioning is the expense ratio, or the fee charged by the fund's managers. The Vanguard ETF has an expense ratio of 0.1%, meaning an investor would pay $10 per year on a $10,000 portfolio. That is far cheaper than the industry average of 0.4% for mutual funds and exchange-traded funds, according to Morningstar.
2. Fidelity Nasdaq Composite Index ETF
The Fidelity Nasdaq Composite Index ETF (ONEQ 1.58%) tracks the Nasdaq Composite index, the most popular benchmark for tech stocks. The Fidelity ETF includes 1,017 holdings. However, the Fidelity ETF is heavily weighted toward stocks in the information technology (44.3%), consumer discretionary (14.4%), and communications services (13.6%) sectors.
The top 10 holdings in the Fidelity Nasdaq Composite Index ETF are as follows :
- Apple: 12.7%
- Microsoft: 10.1%
- Amazon: 5%
- Alphabet (Class C shares): 3.3%
- Alphabet (Class A shares): 3.2%
- Tesla: 3.1%
- Nvidia: 2.2%
- Meta Platforms: 1.5%
- PepsiCo: 1.4%
- Costco: 1.2%
The S&P 500 index generated a total return of 238% over the last decade, but the Nasdaq Composite generated a total return of 310%, or 15.1% on an annualized basis. At that pace, $150 invested in the Fidelity Nasdaq Composite Index ETF would be worth more than $3.7 million in 30 years.
Finally, the Fidelity ETF bears an expense ratio of 0.21%, meaning an investor would pay $21 per year on a $10,000 portfolio. That makes it more expensive than the Vanguard S&P 500 Growth ETF, though its expense ratio is still comfortably below the industry average.
The secret to making money in the stock market
Peter Lynch once said, "The real key to making money in stocks is not to get scared out of them." Readers should take that advice to heart. The stock market may continue to fall in the coming months (or years), and no one -- not even the sharpest minds on Wall Street -- knows when the bear market will end. That means both index funds discussed in this article are at risk of falling further.
However, the S&P 500 Growth index and the Nasdaq Composite have rebounded from bear markets in the past, and both indexes have outperformed the S&P 500 over the long term. That means patient investors can buy the Vanguard S&P 500 Growth ETF and the Fidelity Nasdaq Composite Index ETF with confidence.
