Investing in growth funds
As the economy is rebounding from the blows brought by the pandemic, economic data trickling in shows robust economic activity is speeding up the recovery. While certain industries like information technology and financial services experience growth, you may want to diversify your portfolio toward these sectors. Over the long run, the stock market has a history of rebounding and moving higher. That’s particularly true for stocks that have big growth potential, such as smaller or midsize firms in health care, technology and other emerging sectors. If you’re taking a long view and are interested in growth right now despite the obvious market volatility, here are seven exchange-traded funds to consider.
Invesco QQQ Trust (ticker: QQQ)
QQQ, a fund that focuses on large-cap growth stocks, is one of the most traded ETFs in the U.S. as seen by its high average daily trading volume. Georgia Bruggeman, founder and CEO at Meridian Financial Advisors in Boston, says knowing the fund’s underlying benchmark index can help you understand its composition. This Invesco fund follows the Nasdaq-100, a large-cap growth index that includes 100 of the largest nonfinancial companies. QQQ has outperformed the S&P 500 consistently. In terms of 10-year trailing return performance, QQQ reported about a 20.9% return. The fund holds some of the world’s most innovative companies, including Apple (ticker: AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN) and Tesla (TSLA), among many other prominent names. Since there are “no sector limits,” Bruggeman says whichever company is performing well “will become a bigger and bigger part of the index.” Bruggeman also likes this high-quality ETF for its strong performance and tax efficiency.
Trailing one-year return: 58.3%
Expense ratio: 0.2%
Vanguard Growth ETF (VUG)
VUG looks at companies with an estimated long-term and short-term growth in earnings per share as well as a three-year historical growth in EPS, sales per share, current investments to assets ratio and return on assets. While the fund primarily focuses on large-cap growth, it also has some allocation in midcap companies, adding to the fund’s diversification. Growth funds that have high turnover rates can cost more for investors, but VUG has a low turnover rate of 6%. This, combined with the fund’s stellar performance and cheap cost, makes it a solid choice for investors seeking growth. Like other funds on the list, VUG’s top 10 holdings account for some of the most highly profitable companies in the tech sector. The fund’s exposure to tech is not surprising given the sector will likely continue to experience growth in the years to come.
Trailing one-year return: 56.6%
Expense ratio: 0.04%
SPDR S&P 600 Small Cap Growth ETF (SLYG)
SLYG is a fund that tracks the performance of the S&P SmallCap 600 Index, which measures the performance of small-cap U.S. equities. Small-cap stocks have a record of performing better than stocks with larger market caps. The benefit of investing in small-cap companies is getting in the investment early to maximize your growth potential. The fund selects companies based on strong sales growth, earnings change to price and momentum. You may not have heard some of the names in SLYG’s portfolio like Saia (SAIA) or Ensign Group (ENSG), but the fund also includes some well-known stocks, such as Crocs (CROX) and MicroStrategy (MSTR), to name a couple. “The lack of attention from institutional professionals to the small/micro-cap space has created an excellent investment opportunity,” says Clark Kendall, president and CEO of Kendall Capital Management in Rockville, Maryland. Kendall observes “alpha-generating potential” and says the SPDR S&P 600 Small-Cap Growth is trading on a relative and absolute basis that is very reasonable: 21.3 times earnings, 1.8 times sales and 12 times cash flows.
Trailing one-year return: 78%
Expense ratio: 0.15%
Schwab US Large-Cap Growth ETF (SCHG)
For a passive investor who wants to diversify into growth, this fund allows you to access large-cap equities with growth characteristics at a very low cost. The fund tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, which measures the performance of large-cap growth companies. Among the more than 200 holdings, there is a sector bias toward technology, which is about 39% of the portfolio spread among consumer discretionary, communication services, health care and other sectors. “The Schwab US Large-Cap Growth ETF provides a broad exposure to the technology sector along with other growth-oriented sectors but at a lower expense ratio than the QQQ,” says David Keller, chief market strategist at StockCharts.com. The fund also has a tilt toward midcaps, which account for 12.5% of this ETF’s portfolio. With SCHG, you can position your investment portfolio for long-term growth that beats the S&P 500. “The SCHG recently became overbought, and a pullback here could provide a more actionable entry point,” Keller says.
Trailing one-year return: 56.7%
Expense ratio: 0.04%
ARK Innovation ETF (ARKK)
ARK Innovation ETF is an actively managed fund that focuses on “disruptive innovation” companies. ARK sees innovation as a fundamental requirement for aggressive long-term growth. Cathie Wood, ARK Invest’s founder and chief investment officer, is the curator of ARK’s investment philosophy and the ultimate authority in the firm’s investment decisions. “For investors with a very long-term view, you can (gain) exposure to her main growth drivers for future innovation, namely in artificial intelligence, autonomous vehicles, fintech, DNA sequencing, robotics and 3D printing,” says Bryan Lee, chief investment officer at Blue Zone Wealth Advisors in Los Angeles. Some of the fund’s top holdings are Tesla, Square (SQ) and Roku (ROKU). If you like environmental, social and governance investments, ARK Invest research incorporates ESG principles. Despite the fund’s impressive performance in 2020, investors should be aware of the heightened risk associated with ARKK’s aggressive investment strategy. Vance Howard, CEO and portfolio manager at Howard Capital Management, says ARKK can benefit from the economic rebound. “ARKK should perform very well over the near term as the world economy starts to recover,” he says.
Trailing one-year return: 134%
Expense ratio: 0.75%
iShares Core S&P Mid-Cap ETF (IJH)
With IJH, investors can gain exposure to midcap U.S. stocks, and it’s a great “buy and hold” investment option for long-term growth. The fund tracks the S&P MidCap 400 Index, which represents midcap companies that have been outperforming large-cap stocks since mid-March, Keller says. If this trend continues, “IJH could have greater upside potential,” he says. The fund has the most sector exposure to industrials, at 18%. The industrial sector “should experience tailwinds due to increased infrastructure spending in 2021,” Keller observes. Among the fund’s other top-heavy sector allocations, there is roughly an even allocation that doesn’t show bias toward any particular sector, which may help with the fund’s diversification. SolarEdge Technologies (SEDG), Bio-Techne Corp. (TECH) and Cognex Corp. (CGNX) are among the fund’s 400 holdings. IJH’s strategy is market cap-weighted. This means stocks that increase in value gain more fund exposure while reducing exposure to poor-performing companies, which can help manage portfolio risk.
Trailing one-year return: 75.8%
Expense ratio: 0.05%
SPDR Bloomberg Barclays Convertible Securities ETF (CWB)
Convertible bonds are known as a hybrid security because they are issued as corporate bonds that can be converted into a certain number of shares of common stock. This asset’s features can help investors manage risk because they have less volatility but can also provide equity-like, fixed-income returns. Howard recommends CWB because “convertible bonds will be a much better play than Treasurys or corporate bonds.” Some of the fund’s top issuers include Wells Fargo & Co. (WFC), Broadcom (AVGO), Tesla, Bank of America (BAC) and Southwest Airlines Corp. (LUV). Many of these companies are anticipating high growth as the economy opens again. “As the economy starts to reopen, there should be much upward momentum that should lead convertible bonds higher,” Howard says.
Trailing one-year return: 68.1%
Expense ratio: 0.4%
Seven growth ETFs to watch:
— Invesco QQQ Trust (QQQ)
— Vanguard Growth ETF (VUG)
— SPDR S&P 600 Small Cap Growth ETF (SLYG)
— Schwab US Large-Cap Growth ETF (SCHG)
— ARK Innovation ETF (ARKK)
— iShares Core S&P Mid-Cap ETF (IJH)
— SPDR Bloomberg Barclays Convertible Securities ETF (CWB)
