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 since their valuations are based largely on their long-term potential, which creates a lot of uncertainty for investors.
6 Best Growth ETFs to Consider in 2024
Many investors interested in growth stocks could benefit from investing in growth exchange-traded funds (ETFs). These ETFs will invest in a large basket of growth stocks, giving investors exposure to the types of investments with massive potential for big capital returns without the need to analyze individual companies. Here are six growth ETFs to consider.
|Vanguard Mega-Cap Growth
|iShares Russell Mid-Cap Growth
|Vanguard Small-Cap Growth
|iShares MSCI EAFE Growth
1. Vanguard Growth ETF
The Vanguard Growth ETF (VUG -0.26%) is a large-cap growth stock ETF. The fund aims to replicate the CRSP U.S. Large Cap Growth Index, which constitutes half of the CRSP U.S. Large Cap Index. The latter comprises the top 85% of U.S. stocks weighted by market capitalization, which includes companies with market caps as small as $535 million. So, while the index is primarily composed of large-cap stocks, it includes some mid-cap stocks as well. Those are filtered by certain metrics, such as earnings-per-share growth and return on assets, to divide the index into half -- one half growth stock, the other value stocks.
While weighting the fund by market capitalization keeps fees and asset turnover low, it results in heavy allocations toward the market's biggest companies. The 10 largest holdings account for more than 50% of the portfolio. Likewise, more than 50% of the portfolio is invested in technology companies.
The ETF boasts an impressive tracking history. Over the past 10 years, it trailed its benchmark index by just 6 basis points, which is right in line with its minuscule expense ratio. With an expense ratio of just 0.04%, the Vanguard Growth ETF is one of the most efficient ways to gain additional exposure to growth stocks in your portfolio.
2. Vanguard Mega-Cap Growth ETF
For those who believe the big winners will keep winning, the Vanguard Mega-Cap Growth ETF (MGK -0.29%) 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 in the top 70% of market capitalization, which includes those as small as $1.9 billion. The index is filtered by factors including earnings per share (EPS) growth and return on assets to divide the stock universe in half -- one half growth stocks and the other half value stocks.
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 more than 60% 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. Likewise, its tracking error is very small, about 8 basis points, right in line with its expense ratio.
If you'd like greater exposure to the biggest growth stocks in the market, the Vanguard Mega-Cap Growth ETF has a very low expense ratio of just 0.07%.
3. iShares Russell Mid-Cap Growth ETF
Mid-cap stocks may offer more room for capital appreciation without taking on the risk of small-cap stocks. For those looking to strike the balance, the iShares Russell Mid-Cap Growth ETF (IWP -0.59%) may be for you.
The ETF tracks the Russell Midcap Growth Index, which tracks the half of the mid-cap market with strong earnings-growth expectations and high price-to-book ratios. The mid-cap index is composed of the smallest 800 stocks within the Russell 1000 Index, which includes companies with market caps ranging from around $300 million to $52 billion.
The iShares Russell Mid-Cap Growth ETF holds a much more diversified portfolio than its large- and mega-cap counterparts. The top 10 holdings account for just 12% of the portfolio. Technology is still its biggest sector by far, but it comprises just 33% of the holdings. Healthcare stocks make up another 17%.
The nature of the smaller companies in the index leads to greater turnover, but management keeps turnover relatively low for a mid-cap growth index fund. The fund's performance is within 24 basis points of the benchmark index over the past 10 years, which is right in line with its expense ratio and shows strong management.
If you want to diversify away from the big tech names that dominate growth stocks, the iShares Russell Mid-Cap Growth ETF is a good option.
4. Vanguard Small-Cap Growth ETF
Small-cap growth stocks offer the biggest potential for capital appreciation. Since they're small companies, it takes relatively little in increased buying interest to move the stocks significantly higher. The Vanguard Small-Cap Growth ETF (VBK -0.92%) offers a simple way to gain exposure to this sector without having to dig for individual stocks.
The ETF tracks the CRSP U.S. Small Cap Growth Index. The index takes the top 50% of stocks with the best earnings growth outlooks and strong return on assets from the universe of stocks in the second through 15th percentile of market capitalization. That leads to its selecting stocks with market caps as small as $45 million and as large as $20 billion.
The CRSP U.S. Small Cap Growth Index is a big index, composed of more than 700 companies. That means despite the index including market caps well into mid-cap territory, the Vanguard Small-Cap Growth ETF still invests in a lot of small-cap stocks. Just 6.6% of its portfolio is in the top 10 holdings.
Vanguard does a great job of tracking the index, with a tracking error of just 4 basis points over the past 10 years. In fact, it outperformed the index, almost making up for its expense ratio. Investors looking for more small-caps should pick the Vanguard Small-Cap Growth ETF.
5. iShares MSCI EAFE Growth ETF
Some of the biggest growth opportunities are in international markets. The iShares MSCI EAFE Growth ETF (EFG -0.06%) provides exposure to growth stocks in developed markets outside of the U.S. and Canada.
The ETF tracks the MSCI EAFE Growth Index, which includes large- and mid-cap companies based outside of the U.S. and Canada. The stocks are filtered based on earnings growth history and outlooks.
The ETF is more diversified than its U.S. Large Cap Growth counterparts. Almost one-quarter of the portfolio is invested in the top 10 holdings. The index includes companies from Japan (23% weighting), France (13%), Switzerland (13%), the UK (11%), the Netherlands (7%), and others.
Management keeps turnover relatively low, and it's kept its tracking error within 30 basis points of the benchmark index over the past 10 years. That's better than its expense ratio.
If you're looking for additional international exposure in your portfolio, the iShare MSCI EAFE Growth ETF is a great option.
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6. ARK Innovation ETF
Cathie Wood's ARK Funds rose to prominence in 2020 when shares of the ETF more than doubled. However, shares faltered in 2021. Nonetheless, her team's ability to find great companies producing innovative technology ought to lead to good long-term results.
The ARK Innovation ETF (ARKK -2.83%) 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. While it maintains a global outlook, it's heavily concentrated in U.S. companies, with more than 90% of the portfolio held in domestic stocks.
More than half of the ETF's portfolio remains invested in its top 10 holdings, as Wood often lets its winners run and isn't afraid of betting big on her highest-conviction stock picks. For example, Tesla (TSLA 0.52%) accounts for more than 10% of the portfolio.
As an actively managed ETF, the ARK Innovation ETF has a relatively high expense ratio. However, if you believe in Wood and her team's ability to find the most innovative companies and manage a portfolio for optimal growth over the long term, it's worth the price.