Investing in the stock market is a powerful wealth-building opportunity, but buying individual stocks can sometimes be tedious and time-consuming.
Exchange-traded funds (ETFs) can be a smart option for those looking for a simpler, no-fuss way to invest while still reaping the rewards of long-term gains. An ETF is a basket of securities bundled together into a single investment, making it easier to build a diversified portfolio with just one fund.
There are countless ETFs to choose from, all with their own advantages and disadvantages. While there are never any guarantees when it comes to the stock market, these three growth ETFs have a history of beating the market and could help maximize your long-term earnings.
1. Vanguard Growth ETF (VUG)
The Vanguard Growth ETF (VUG +1.52%) contains 299 stocks with the potential for above-average growth. Around 56% of the fund is allocated to stocks in the tech sector, which can increase its growth potential -- as well as its risk.
Tech stocks, in general, tend to be more volatile than stocks in other industries. This is especially true during periods of market volatility. But they can also experience more explosive growth, helping supercharge your potential earnings.
While growth ETFs can often be hit harder than other funds during market downturns, they also tend to thrive when the market is surging. Over time, though, the positive returns should ideally outweigh the negatives, leading to above-average returns.
NYSEMKT: VUG
Key Data Points
While past performance doesn't predict future returns, the Vanguard Growth ETF has a history of beating the market. Over the past 10 years, it's earned total returns of more than 114% -- compared to 81% for the S&P 500.
2. Schwab U.S. Large-Cap Growth ETF (SCHG)
The Schwab U.S. Large-Cap Growth ETF (SCHG +1.52%) is similar to the Vanguard Growth ETF in many ways, except it's slightly more diversified. It contains 250 stocks, with around 46% allocated to the tech sector.
In general, a more diversified portfolio results in less risk. While this growth ETF still allocates nearly half of its composition to tech stocks, that's less than many other similar growth funds. It also contains more stocks in total than the Vanguard Growth ETF, which creates even more diversification.
To be clear, this investment still carries more risk than many other ETFs -- namely broad-market funds, such as S&P 500 ETFs or total stock market ETFs. But compared to other growth ETFs, SCHG has more total stocks and less of an emphasis on the tech sector.
NYSEMKT: SCHG
Key Data Points
Over the last 10 years, this ETF has managed to substantially outperform the S&P 500. Again, though, this doesn't necessarily mean it will continue seeing similar returns in the future, so it's wise to keep expectations in check when investing in growth ETFs.
3. Invesco QQQ Trust (QQQ)
Invesco QQQ Trust (QQQ +1.31%) is a prime example of a higher-risk, higher-reward growth ETF. It only contains 101 stocks, with a whopping 59% of the fund dedicated to the tech sector -- making it less diversified than the other two ETFs on this list.
QQQ also has the highest expense ratio at 0.20%, compared to 0.04% for both VUG and SCHG. While that may not seem like a significant difference, even a slightly higher expense ratio can add up to tens of thousands of dollars in fees over decades.
NASDAQ: QQQ
Key Data Points
That said, QQQ has also earned the highest total returns of the ETFs listed here by a considerable margin. While these numbers are tempting, be sure you're willing to take on higher levels of risk before you invest in this ETF. Higher-risk ETFs can be incredibly volatile, so if you choose to buy, prepare yourself for more extreme ups and downs in the short term.
An important caveat about growth ETFs
While growth ETFs are designed to beat the market, there are no guarantees they'll actually do so. While ETFs, in general, carry less risk than investing in individual stocks, there's always a chance they could underperform.
Before you buy, consider your investing goals and priorities. If relative safety and security are your biggest targets, a broad-market fund may be a better option. These types of funds are much more diversified than growth ETFs and aim to track the market's performance over time, helping to reduce risk.
On the other hand, if you're comfortable with higher levels of risk and volatility in exchange for potentially higher returns, growth ETFs could be a good fit for your portfolio. There are no promises they'll earn above-average returns, but the right funds will have a better chance of outperforming the market over time.
Investing in growth ETFs can be a fantastic way to grow your portfolio with less effort, and you may even be able to beat the market if your fund performs well. By investing in the right places and keeping a long-term outlook, you could earn more than you might think.
