Is it the Right Time to Invest in Growth ETFs?

In his testimony, Federal Reserve Chair Jerome Powell said that the central bank is still on track to cut interest rates this year. Low rates are generally favorable for growth stocks as they reduce the cost of borrowing, often needed to finance the expansion of companies. Lower rates typically reduce the attractiveness of fixed-income investments like bonds, leading investors to seek higher returns in the equity markets. Growth stocks, with their potential for high returns, become more appealing to investors in this environment, driving up demand and, consequently, their prices.

Growth investing is likely to shine this year. Investors seeking to benefit from the trend should invest in growth ETFs like Vanguard Growth ETF VUG, iShares Russell 1000 Growth ETF IWF, iShares S&P 500 Growth ETF IVW, Schwab U.S. Large-Cap Growth ETF SCHG and Vanguard Mega Cap Growth ETF MGK. These are the most popular options in the large-cap space and have a solid Zacks Rank #2 (Buy), suggesting outperformance in the months ahead (read: 5 Top-Ranked ETFs at New Highs Set to Soar Further).

Powell noted that inflation had “eased substantially” since hitting a 40-year high in 2022 but that policymakers still needed “greater confidence” in its continued decline before cutting rates. He added that there are risks of keeping monetary policy tight for too long and damaging an ongoing economic expansion that has sustained a below 4% unemployment rate for two years.

The latest bouts of weak data have raised the bets that the Fed might lower interest rates as soon as June. The U.S. manufacturing sector recorded its 16th consecutive month of decline in February, while Michigan University’s consumer confidence index dropped slightly last month. U.S. personal spending data also showed the weakest reading in three years. Traders now see a 72.7% chance of the first rate cut this year in June, per CME Group's FedWatch tool (read: Is US Manufacturing Space Improving? 4 Sector ETFs Look Decent).

Additionally, the U.S. stock market has been on a surge this year, hitting new all-time highs fueled by strong corporate earnings, AI developments and renewed confidence in the tech sector. Growth funds generally tend to outperform during an uptrend.

Growth investing focuses on capital appreciation rather than annual income or dividends. It is a stock-buying strategy that aims to profit from companies that grow at above-average rates compared to their industry or the market. This is a more active attempt versus the value to build up the portfolio and generate more return on the capital investment. However, these funds offer exposure to stocks with growth characteristics that have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility, especially compared to value stocks.

Let’s discuss the abovementioned ETFs in detail below:    

Vanguard Growth ETF (VUG)

Vanguard Growth ETF offers exposure to the growth segment of large-cap equities and follows the CRSP US Large Cap Growth Index. It holds 208 stocks in its basket, with a higher concentration on the top two firms. Technology dominates the fund’s portfolio at 55.8%, while consumer discretionary and industrials round off the next two sectors with 19.6% and 8.7% share, respectively.

Vanguard Growth ETF has AUM of $117.6 billion and an average daily volume of 1 million shares. It charges 4 bps in fees per year.

iShares Russell 1000 Growth ETF (IWF)

iShares Russell 1000 Growth ETF provides exposure to large and mid-capitalization U.S. equities that exhibit growth characteristics by tracking the Russell 1000 Growth Index. iShares Russell 1000 Growth ETF holds 443 securities in its basket with a tilt toward the information technology sector, while consumer discretionary, communication and healthcare receive double-digit exposure each.

With AUM of $88.4 million, iShares Russell 1000 Growth ETF trades in heavy volume of around 1.4 million shares a day on average and charges 19 bps in annual fees.

iShares S&P 500 Growth ETF (IVW)

iShares S&P 500 Growth ETF tracks the S&P 500 Growth Index and holds 225 stocks in its basket. It is heavily concentrated on the top two firms, with double-digit exposure. The ETF is skewed toward information technology at 47.6%, while consumer discretionary and communication round off the next two spots with a double-digit exposure each (read: Here's Why Growth ETFs are Scaling New Highs).

iShares S&P 500 Growth ETF charges 18 bps in annual fees and has amassed $39 billion in its asset base. The fund trades in an average daily volume of 2.6 million shares.

Schwab U.S. Large-Cap Growth ETF (SCHG)

With AUM of $26.3 billion, Schwab U.S. Large-Cap Growth ETF follows the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. It holds 251 stocks in its basket, with a large concentration on the top two firms. From a sector look, information technology takes the top spot at 45.5% share, while consumer discretionary, communication services and health care receive double-digit exposure each in the portfolio.

Schwab U.S. Large-Cap Growth ETF charges 4 bps in annual fees and sees an average volume of around 1.5 million shares a day.

Vanguard Mega Cap Growth ETF (MGK)

Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 82 securities in its basket, with none accounting for more than 15% of the total assets. It has key holdings in technology and consumer discretionary that account for double-digit exposure each.

Vanguard Mega Cap Growth ETF charges 7 basis points in annual fees and trades in a good volume of around 346,000 shares a day on average. The fund has AUM of $18.7 billion.

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iShares Russell 1000 Growth ETF (IWF): ETF Research Reports

Vanguard Growth ETF (VUG): ETF Research Reports

Schwab U.S. Large-Cap Growth ETF (SCHG): ETF Research Reports

iShares S&P 500 Growth ETF (IVW): ETF Research Reports

Vanguard Mega Cap Growth ETF (MGK): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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