Growth stocks can offer investors an exciting ride, but that ride can be wild (and scary) at times. Younger, faster-growing companies tend to produce higher investment returns but are often riskier. They don't always work out, and even the ones that do see some large price swings along the way.
To help level out this volatility, smart investors turn to diversification, spreading their money across many growth stocks to keep one lousy pick from sinking the entire portfolio. That can be challenging if the investor is working on a budget. Exchange-traded funds (ETFs) offer a way to overcome that challenge because they represent groups of individual stocks that trade under a single ticker symbol. Even a small amount invested (say $500) in an ETF gives the buyer access to growth stocks but also some level of hedge against volatility.
Here are three fantastic growth funds that offer solid upside and enough diversification to minimize risk. Best of all, investors can own all three for under $500.
1. iShares S&P 500 Growth ETF
Growth stocks come in different flavors, so knowing what type of companies go into each growth ETF is helpful.
For example, the iShares S&P 500 Growth ETF (IVW 0.03%) is a great starting point for any investor. It includes growth stocks from the S&P 500 index, which is arguably the most famous index in the U.S. market. The index comprises 500 prominent U.S. companies, but it's a blend of growth and value stocks. The iShares S&P 500 Growth ETF focuses on the faster-growing companies in the index.
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The S&P 500 has strict inclusion criteria. Generally speaking, the index consists of blue chip U.S. stocks with large market caps. Larger companies are typically more established (and less volatile) than smaller up-and-coming ones. The ETF includes 211 holdings, primarily well-known growth stocks, including the "Magnificent Seven" stocks, Broadcom, and Eli Lilly.
Technology is most prominent sector in this ETF, accounting for about 37% of the stocks. Communications, financials, and consumer discretionary sectors all have at least 10% weighting in the ETF.
Overall, the iShares S&P 500 Growth ETF's emphasis on large caps makes it a great middle-ground for investors who want the upside of growth but aren't looking for too much risk and volatility.
2. iShares Russell 2000 ETF
If you want more potential upside and are willing to stomach more risk and price volatility, the iShares Russell 2000 ETF (IWM 0.34%) could be for you. This ETF tracks the Russell 2000, a market index of approximately 2,000 small-cap U.S. stocks.
Small caps typically aren't household names, and it can be extremely challenging and tedious for an individual to research and manage them. Therefore, an ETF like this is a simple way to add diverse small-cap exposure to a portfolio.
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The largest holding in the iShares Russell 2000 ETF is Sprouts Farmers Market, at just 0.62%. The ETF currently has 1,956 individual holdings.
There is also more sector balance than you'll find in most growth ETFs. Financials are the heaviest-weighted sector in the ETF, at 19.6%, followed by industrials (17.6%), healthcare (16.9%), and technology (12.4%). All the other sectors have weightings of less than 10% each.
Almost every ETF charges an expense ratio to operate the fund. The iShares Russell 2000 ETF is a tad higher than many others at 0.19%. That's $0.19 charged every year on $100 invested. It seems like a reasonable fee for off-loading countless hours of research and work to stay involved in a vast small-cap space with far more losing stocks than winners.
3. iShares MSCI EAFE Growth ETF
Spending most of your time on the U.S. stock market makes sense. It's the largest, with a cumulative market cap of approximately $57 trillion, many times larger than China's stock market, a distant second at just $7.6 trillion. However, ignoring the numerous high-quality companies outside the United States and Canada would be a mistake. The tricky part is that foreign companies may not trade on U.S. exchanges or may report in other currencies, making it difficult to stay up on them.
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Such a situation is resolved best with an ETF like the iShares MSCI EAFE Growth ETF (EFG 0.38%). MSCI is the acronym of Morgan Stanley Capital International and EAFE is the acronym for Europe, Australasia, and the Far East. Together they form the MSCI EAFE Index, which tracks the performance of large- and mid-capitalization companies in the EAFE region.
The ETF has 351 holdings, representing the world's most prominent international companies. Some of the top holdings are SAP, ASML Holding, Novo Nordisk, and LVMH Moët Hennessy-Louis Vuitton. These are leading software, semiconductor manufacturing, healthcare, and luxury goods companies.
Like the iShares Russell 2000 ETF, the iShares MSCI EAFE Growth ETF commands a higher expense ratio (0.36%) due to the work involved in managing foreign stocks. Still, it's hard to beat the convenience here. Investors who want to diversify should strongly consider international stocks because you never know how political or economic circumstances can affect the U.S. market.
Owning all three ETFs gives wide-ranging growth exposure with a diverse grouping of blue chips, small caps, and international stocks. You can confidently hold this combination and build on it, even if you have only $500 for an initial investment.
