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On the surface, it appears growth stocks and the related exchange-traded funds (ETFs) held up relatively well last year. The S&P 500 Growth Index fell 0.10% in 2018, while the S&P 500 slid 4.60%, but drill down into the fourth quarter and that's where things got really ugly for growth ETFs.
In the last three months of 2018, the S&P 500 Growth Index plunged 14.90%, a decline that was 110 basis points worse than the S&P 500's. The tide is turning in the growth factor's favor early this year. While there is some evidence to support the notion that investors are embracing defensive sectors , the S&P 500 Growth Index is up nearly 9%.
The veracity of growth ETFs' recent resurgence is dependent upon multiple factors, including increased risk appetite and the performance of higher beta, cyclical sectors. In other words, it will take some gumption for investors to get involved with growth ETFs over the near term, but that risk could easily be rewarded.
Here are some of the best growth ETFs for investors to consider right here, right now.
iShares Core S&P U.S. Growth ETF (IUSG)
Expense Ratio: 0.04%, or $4 annually per $10,000 invested
Everyone loves a good deal when it comes to index funds and ETFs, but factor-based strategies, including growth ETFs, typically have slightly higher fees than traditional broad market funds. Don't worry because there are a handful of growth ETFs with annual fees of 0.04%. The $5.50 billion iShares Core S&P U.S. Growth ETF (NASDAQ: IUSG ) is one of those funds.
IUSG, which turns 19 years old later this year, tracks the S&P 900 Growth Index, giving this growth ETF a deeper bench than funds tracking the S&P 500 Growth Index. This iShares fund holds 534 stocks. One element to consider with growth ETFs, including IUSG, is increased volatility, but IUSG's three-year standard deviation of just over 12% is not alarmingly high.
Another hallmark of growth ETFs is large allocations to the technology and consumer discretionary sectors. Those sectors combine for almost 37% of IUSG's weight. Microsoft (NASDAQ: MSFT ) and Amazon (NASDAQ: AMZN ) are IUSG's two largest holdings, combining for nearly 12% of the fund's weight.
Invesco S&P 500 Pure Growth ETF (RPG)
Expense Ratio: 0.35%
Investors searching for purity with their growth ETFs will enjoy the Invesco S&P 500 Pure Growth ETF (NYSEARCA: RPG ). RPG tracks the S&P 500 Pure Growth Index, which is slightly different than the aforementioned S&P 500 Growth benchmark.
RPG's underlying index "measures the performance of securities that exhibit strong growth characteristics in the S&P 500 Index. Growth is measured by the following risk factors: sales growth, earnings change to price and momentum," according to Invesco .
With a more stringent growth qualifier, RPG's roster of 104 stocks is smaller than some rival large-cap growth ETFs. While RPG holds fewer stocks than some rival growth ETFs, the Invesco fund mitigates stock-level concentration risk by allocating no more than 2.12% of its weight to any of its holdings.
The fund devotes 22.50% of its weight to tech stocks while the healthcare and industrial sectors combine for almost 29%.
Invesco S&P SmallCap 600 Pure Growth ETF (RZG)
Expense Ratio: 0.35%
The Invesco S&P SmallCap 600 Pure Growth ETF (NYSEARCA: RZG ) is the small-cap cousin to the aforementioned RPG and uses a similar weighting methodology that focuses on factors, including sales growth, earnings change to price and momentum.
Alone, small-cap stocks are more volatile than large-caps, but adding the growth factor to that equation ratchets up volatility. Over the past three years, RZG was 170 basis points more volatile than the S&P SmallCap 600 Index while outperforming that benchmark by 240 basis points. RZG's 149 holdings have an average market capitalization of $2 billion, the high end of small-cap territory.
Just as large-cap growth ETFs are dominated by tech stocks, small-cap growth ETFs like RZG often feature big weights to healthcare names. That sector accounts for 21.15% of RZG's weight while consumer discretionary and financial services names combine for nearly 30%. Growth stocks often command premium valuations and that is true with this growth ETF. RZG's price-to-earnings ratio of 22.78 is ahead of the 20.09 found on the S&P SmallCap 600 Index.
First Trust Large Cap Growth AlphaDEX Fund (FTC)
Expense Ratio: 0.61%
The First Trust Large Cap Growth AlphaDEX Fund (NASDAQ: FTC ) is a growth ETF with some issues investors need to mull over before jumping in. Notably, FTC is pricey among growth ETFs and over the past three years, the fund trailed the S&P 500 Growth Index by a wide margin, indicating that high fees have not been justified.
To be fair, there are times when FTC has outperformed more traditional growth ETFs and the fund uses a unique, more tactical methodology that standard growth ETFs lack. FTC targets the NASDAQ AlphaDEX Large Cap Growth Index. According to First Trust , that index is constructed "by ranking the eligible stocks from the NASDAQ US 500 Large Cap Index on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors."
Home to 188 stocks, FTC does not allocate more than 1.07% of its weight to any of its holdings. Tech stocks account for almost a quarter of this growth ETF's roster.
Nuveen ESG Mid-Cap Growth ETF (NUMG)
Expense Ratio: 0.40%
Investors looking to practice virtuous investing have a growing number of options to consider thanks to the population boom among environmental, social and governance (ESG) ETFs. That universe originated with basic broad market approaches but has grown to include factor-based strategies, including the Nuveen ESG Mid-Cap Growth ETF (CBOE: NUMG ).
This growth ETF is just over two years old and has $54.40 million in assets under management, which is actually a pretty good growth trajectory for a refined growth ETF like this.
According to ETF Trends , NUMG's "environmental aspect covers factors like climate change, natural resource usage, waste management and deforestation. Social covers employee relations, diversity, supply chain management and health and safety. Lastly, the governance portion includes board quality, executive compensation, public policy and business ethics."
Just 82 stocks meet NUMG's screening requirements and nearly half the growth ETF's roster hails from the industrial and technology sectors.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
