‘Tis the week of August 17 and many of you are probably going back to school right now — however that may look. In honor of everyone returning year after year to the grind and growing as people, we’ll explore some assets that do very much the same thing: ETFs, or exchange traded funds. These slightly boring but generally reliable securities provide one of the best long-term bets. They offer steady growth over the course of many years.
In this first of two editions, I’ll focus on growth ETFs. This category of exchange traded funds offers higher potential gains in the long term with more volatility and risk in the short term. Growth ETFs consist of companies that investment professionals deem to have higher-than-average growth forecasts. These businesses can be less established ones with plenty of room to grow, but can also include giants such as Facebook and Amazon that are still looking to expand. These picks may or may not be right for your portfolio depending on what you prioritize, but once you decide whether they are for you, here are my favorite growth ETFs.
Vanguard Russell 1000 Growth Index Fund ETF (VONG)
For the past decade this guy has been cranking out unreal results, increasing 110% just in the last five years. This ETF is a large cap growth ETF. This means its holdings are all large capitalization companies. Specifically, it is a collection of companies within the Russell 1000 index (the largest 1,000 publicly listed companies in the US) that are considered to have high growth potential.
For an ETF, an expense ratio should generally not exceed 1% (I personally hate to go above 0.5%), with lower always better (because that means you’re paying less money to the investor). I love this ETF because it combines its terrific growth rate with an almost nonexistent net expense ratio at 0.08%.
A second crucial data point to consider is the percent of the ETF’s total holdings that come from the ten most commonly held companies in the fund. This indicates how concentrated the fund’s holdings are within a certain group of companies. When the percent is higher, that means the fund is more reliant on a small number of companies to perform well and is thus at higher risk (because if even one performs badly, the whole fund suffers).
Unfortunately, this ETF has 44% of its holdings in its top ten companies, meaning almost half the fund depends on the fortunes of ten companies. This is objectively risky, but when it contains companies such as Microsoft, Apple, Amazon, Alphabet, and Visa, you can see the reasoning behind it. In investing it’s best to diversify, but this ETF basically gives you a chunk of all the tech giants and other large fast-growing companies that you were probably going to buy anyway.
iShares Morningstar Mid-Cap Growth ETF (JKH)
Because we all should place an emphasis on diversifying our portfolios, this growth ETF consists of mid-size (mid cap) companies, while the next one contains small (small cap) companies. By buying each of these, you would effectively be spreading your risk across companies of all sizes with high growth potential. Since 2004, the ETF has grown in value from $58 to $315–an increase of over 400%. Practically all along the way its trajectory has been up, with exception to a few minor bumps, the recession of 2008, and the recent covid crash.
Only 16% of JKH holdings are in its top ten companies, representing a well-diversified portfolio. The net expense ratio is kind of high for me at 0.30%, but at the end of the day you won’t be noticing that small amount missing from your probably above average gains. The main companies included here are MercadoLibre, Square, DexCom, and Lululemon Athletica.
Vanguard Small-Cap Growth Index Fund ETF (VBK)
To round off our diversification, we’ll look at a small cap growth ETF. VBK has increased around 300% since 2004, gaining 62% in the last five years. It has an ideal net expense ratio at 0.07% so practically feels as if you’re not even paying the fund manager. Only 8% of holdings are in the top ten companies, demonstrating very well balanced risk. The companies with the highest percent of holdings in the ETF are Coupa Software, Teladoc Health, Teradyne, and Zebra Technologies. There really aren’t many good small cap growth ETFs out there, so if you’re interested in this category you’ll struggle to find much better.
While our writers talk about these stocks, we are in no way giving the reader investment advice or urging them to buy any stocks. The goal of this series is merely to provide an opinion on certain stocks for the longer term; what our readers choose to do with this opinion is entirely up to them. This is not meant in any way to be investment advice.