Growth-focused exchange-traded funds (ETF) are as straightforward as they sound: They are portfolios of growth stocks.
But not all funds are created equal, and investors must perform due diligence in order to find the best growth ETFs to meet their goals.
By definition, a growth stock is any company with an above-average growth profile. In other words, these are companies whose revenue and earnings are expanding faster than the market average.
They also often pay little or no dividends (but not always, as you'll read later), opting instead to reinvest their cash flow in the business to maintain their growth.
This is why owning growth ETFs makes so much sense. By diversifying your growth-stock holdings through a fund, you're protecting your downside.
Funds like these tend to be cheap, efficient vehicles that allow you to invest in dozens, if not hundreds, of growth stocks without having to trade them all individually in your account.
They also allow you to be tactical, investing in sectors and industries you think are best positioned to rise going forward.
Investors abandoned growth stocks in 2022 as inflation soared to a 40-year high and the Federal Reserve started raising interest rates in an aggressive way that threatened to send the economy into recession.
But this corner of the market came back with a vengeance due in part to strength in the Magnificent 7 stocks, the group of tech and artificial intelligence (AI) firms that includes Nvidia (NVDA) and Microsoft (MSFT).
Looking ahead, easing inflation and the prospect of more Fed rate cuts will likely "provide upside potential in earnings for growth stocks, particularly in the technology and communication services sectors," says Jeff Buchbinder, chief equity strategist at LPL Financial.
This virtuous combination could keep the wind at growth's back.
With that in mind, here are six of the best growth ETFs to add to a core portfolio for the long haul.
Data is as of October 28.
Invesco QQQ ETF
- Assets under management: $300.0 billion
- Dividend yield: 0.6%
- Expenses: 0.20%, or $20 annually for every $10,000 invested
Buying the Invesco QQQ ETF (QQQ, $495.40) is a focused bet on 100 of the most innovative companies trading on the Nasdaq stock exchange.
While many of the best growth ETFs are heavy in technology stocks, QQQ is really loaded up at 50% of the portfolio. It also has large positions in communication services (16%) and consumer discretionary stocks (13%) as well as smatterings of a few other sectors.
The ETF tracks the performance of the Nasdaq-100 Index. This is not only a collection of 100 of the top Nasdaq stocks, but also 100 of the largest non-financial stocks trading on the exchange. Top QQQ stocks are Apple (AAPL) and Nvidia, whose combined weightings account for more than 17% of the portfolio.
While Invesco does offer a less costly version, the Invesco NASDAQ 100 Index Fund (QQQM), QQQ's 30-day average trading volume is more than 17 times QQQM's. Traders buy QQQ because of this liquidity advantage; QQQM suits buy-and-hold investors looking to save a little on fees. It charges 0.15%, five basis points less than its sister fund. (A basis point equals 0.01%.)
"The resilience of QQQ is a testament to the strength of the Nasdaq-100 Index, and to the enduring partnership of Invesco and Nasdaq," said Sean Wasserman, vice president and head of Index and Advisory Services for Nasdaq, at QQQM's launch in 2020.
A fun fact about QQQ is that it has a different fund structure than QQQM. QQQ is a trust, which means it can't lend out its shares to short sellers to generate revenue to offset fees, but QQQM can. In addition, QQQ cannot reinvest dividends, a strategy popular with buy-and-hold investors.
Over the past decade, QQQ has averaged an annualized total return (price change plus dividends) of 18% versus 13% for the SPDR S&P 500 ETF Trust (SPY), whose tech weighting is approximately half QQQ's.
Something to keep in mind before you decide to buy.
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iShares S&P 500 Growth ETF
- Assets under management: $54.3 billion
- Dividend yield: 0.5%
- Expenses: 0.18%
There are two versions of this iShares ETF: the iShares S&P 500 Growth ETF (IVW, $97.66) and the iShares S&P 500 Value ETF (IVE).
For the purpose of this list of the best growth ETFs to buy, we'll focus on IVW, which tracks the performance of the S&P 500 Growth Index, a collection of growth-oriented stocks in the S&P 500.
The growth characteristics used to select stocks for the sub-index include the three-year change in earnings per share divided by the price per share, the three-year sales-per-share growth rate, and the 12-month price change.
There are roughly 230 holdings in IVW with a median market cap of $741 billion, significantly higher than its large-cap growth peers and its benchmark.
Less than 9% are mid-cap stocks, with the rest large or mega caps.
The top three sectors by weighting in IVW are technology (50%), consumer discretionary (14%) and communication services (12%). The top 10 holdings account for 61% of its $54 billion in net assets. IVW's reported turnover is 31%, which means it turns the entire portfolio once every three years.
Launched in May 2000, the iShares S&P 500 Growth ETF has averaged an annualized return of about 7.9% since its inception. A $10,000 investment 24 years ago is currently worth about $64,000. A key reason for the healthy returns is the reasonable management fee of 0.18%.
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Vanguard Growth ETF
- Assets under management: $143.2 billion
- Dividend yield: 0.5%
- Expenses: 0.04%
The Vanguard Growth ETF (VUG, $393.12) charges 0.04% annually, providing investors with a low-cost option to invest in large-cap growth stocks. And at $143 billion in assets under management, it's one of the biggest growth ETFs you can buy.
This fund tracks the performance of the CRSP US Large Cap Growth Index. This index classifies growth stocks using six factors, including three-year historical growth in earnings per share and sales per share as well as return on assets.
The result is a diversified group of 200 large-cap growth stocks with a median market capitalization of $1.4 trillion. In other words, the average VUG holding is a mega-cap stock.
Tech stocks account for approximately 58% of the fund's total net assets, with consumer discretionary stocks the next highest sector weighting at 18%. VUG's top 10 holdings make up about 59% of the fund's total net assets and are led by Apple, Microsoft and Nvidia.
The growth characteristics are apparent. The portfolio's typical stock has averaged a 24% earnings growth rate over the past five years – and they're priced like it, trading at 37 times earnings and 10.8 times book value.
VUG, whose annual turnover is very low at 5%, has averaged an annualized total return of 16% over the past decade.
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SPDR S&P 600 Small Cap Growth ETF
- Assets under management: $3.6 billion
- Dividend yield: 1.1%
- Expenses: 0.15%
If you're constructing a diversified portfolio of the best ETFs, including a small-cap fund in your holdings can't hurt. The SPDR S&P 600 Small Cap Growth ETF (SLYG, $92.01) is one noteworthy option.
Launched in September 2000, SLYG has grown to $3.6 billion – a healthy size, though much smaller than the more widely known iShares Russell 2000 ETF (IWM), which has roughly $70 billion in net assets.
IWM tracks the performance of the Russell 2000, a float-adjusted capitalization-weighted index that's a subset of the Russell 3000. The Russell 2000 represents the smallest 2,000 or so stocks in the Russell 3000, which is designed to mirror 98% of the investable U.S. equity market.
SLYG, on the other hand, tracks the performance of the S&P Small Cap 600 Growth Index, a collection of stocks found within the S&P Small Cap 600 Index that exhibit the most robust growth characteristics, including sales growth, earnings change relative to price and momentum.
The weighted average market cap for SLYG holdings is $3.8 billion, with three- to five-year earnings per share growth of 13.2% and a price-to-earnings (P/E) ratio of 18.1.
SLYG's top three sectors by weight are industrials (20%), consumer discretionary (16%) and technology (14%). Its top 10 holdings account for just 11% of the portfolio, so no one stock overly influences the fund's performance.
The biggest holdings at present include industrial pipe manufacturer Mueller Industries (MLI) and specialty metals maker Carpenter Technology (CRS). The fund is reconstituted and rebalanced once a year on the third Friday in December.
Because the SPDR S&P 600 Small Cap Growth ETF only rebalances once a year, it can keep expenses low at 0.15%. It has an annual total return of 7% since inception.
Learn more about SLYG at the State Street Global Advisors provider site.
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Global X Lithium & Battery Tech ETF
- Assets under management: $1.2 billion
- Dividend yield: 1.4%
- Expenses: 0.75%
The Global X Lithium & Battery Tech ETF (LIT, $44.50) tracks the performance of the Solactive Global Lithium Index, a collection of companies involved in the lithium cycle, from mining the mineral to producing lithium batteries for electric vehicles (EV) and other uses.
LIT consists of 40 market cap-weighted stocks with a weighted average market value of $82.5 billion. The average holding has a 2024 price-to-earnings ratio of 16.2 times and a 2024 price-to-book ratio of 1.7 times.
Four sectors account for all 40 stocks in LIT: materials (43% weighting), industrials (22%), consumer discretionary (18%) and technology (17%).
From a country perspective, the top three by weight are China (41%), the U.S. (22%) and Australia (11%). Global X even breaks the weightings by industry, with materials, capital goods, technology hardware and equipment, and automobiles and components each accounting for double-digit percentages of the portfolio.
The Global X Lithium & Battery Tech ETF is fairly top-heavy, with the 10 largest holdings accounting for more than half of the ETF's $1.3 billion in net assets. Lithium stock Albemarle (ALB) and electric vehicle maker Tesla (TSLA) are among the fund's top positions.
LIT was launched in July 2010. In the 14 years since, it's averaged a 4% annualized total return.
While its expenses are relatively high at 0.75%, the ETF provides easy access to a secular growth trend that's nowhere near ending.
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WisdomTree International Hedged Quality Dividend Growth Fund
- Assets under management: $2.8 billion
- Dividend yield: 1.7%
- Expenses: 0.58%
If you're a dividend investor, the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG, $45.23) is an excellent way to invest beyond domestic U.S. markets.
As the name suggests, it is an international ETF whose holdings are based outside the U.S. and Canada. It is also dividend-focused and hedged to minimize fluctuations between the U.S. dollar and foreign currencies.
The fund tracks the performance of the WisdomTree International Hedged Quality Dividend Growth Index. The index starts with the top 300 companies from the WisdomTree International Index based on growth and quality factors. The holdings are then weighted based on the annual cash dividends paid. So, if company A paid $1 a share, and company B paid $2, company B would get a higher weighting.
Its top three countries by weight are the United Kingdom (18%), Switzerland (15%) and Japan (14%). There is a sliver of exposure to U.S. stocks and no exposure to mainland China.
IHDG's dividend yield is a healthy 1.7% vs the S&P 500's 1.2%. The fund launched in May 2014, and a $10,000 investment at inception is worth $25,000 today. Even with mediocre performance from European stocks in recent years, this top growth ETF has averaged an average annual return of 11% over the past five years.
A significant dividend helped immensely. So, too, did the hedging.
The WisdomTree International Hedged Quality Dividend Growth Fund currently has about 250 holdings, with the largest – Spanish apparel retailer Industria de Diseño Textil – accounting for nearly 6% of the $2.8 billion in net assets. The top 10 holdings account for about 35% of the fund's net assets.
The top three sectors by weight are consumer discretionary (21%), healthcare (20%) and industrials (17%).
Learn more about IHDG at the WisdomTree provider site.
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