Playing The Growth-Stocks Comeback

By Aaron Levitt | April 29, 2010 AAA

As the financial crisis began its rebound, investors returned to risk, piling money into emerging markets, commodities and alternative hedge fund style investments such as iShares Diversified Alternatives Trust (NYSE: ALT). However, since the start of 2010 these types of investments have underperformed more stable assets as investors have sought shelter. For example, the emerging market proxy, the iShares MSCI Emerging Markets Index (NYSE: EEM) is up only about 1.5%, while the iShares Dow Jones Select Dividend Index (NYSE: DVY), which represents a basket of stable dividend-paying stocks, is up about 8% in the same time.

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It is very important to have exposure to emerging-market and commodities assets inside a portfolio, but with thoughts of Greece, inflation and general market malaise running through their heads, investors (especially those nearing retirement) are worried about risk. Adding a touch of large-cap domestic growth stocks can do wonders in reducing risk while still adding that growth to a portfolio.

It's Not the Go-Go '90s Anymore
At the beginning part of the dotcom boom, growth stocks ruled the roost. These companies, characterized by their higher revenue multiples or even negative earnings and lack of dividends were the talk of the town. Stocks soared to lofty heights based strictly on their earnings potential. Growth stocks stereotypically represented companies that were in their beginning stages. However, today this simply isn't the case. Well established and profitable firms such as Intel Corporation (NASDAQ: INTC) make the grade as growth stocks.

Adding That Growth
Adding a touch of growth style stocks via exchange-traded funds (ETFs) can help investors stay committed to fighting inflation and capital appreciation while reducing their overall risk. These ETFs provide different exposure to the broad market with their hefty positions in technology, health care and consumer organizations.

With nearly 73% of its 421 holdings in the tech, consumer and health care sectors, the Vanguard Growth ETF (NYSE: VUG), is well positioned to help boost a portfolio in the growth department. The fund charges a rock bottom expense ratio of 0.15% and yields about 1%.

The Rydex S&P 500 Pure Growth (NYSE: RPG) provides access to the 117 stocks within the S&P 500 that adhere to that style and is a perfect example of what a growth stock ETF should be. Top holdings include Priceline.com (NASDAQ: PCLN) and Red Hat (NYSE: RHT) with the tech sector accounting for 27% of total assets.

Investors also have the ability to add the one-two punch of small cap growth through funds such as the Vanguard Small Cap Growth (NYSE: VBK). Small caps have historically out performed their larger counterparts in economic recoveries. (Learn more about smaller companies and their potential for growth in Small Caps Boast Big Advantages.)

Bottom Line
As investors look to stem their risk profiles and move away from alternative assets, large cap growth stocks may be just what their portfolio needs. They can help shield a portfolio from risk, while still executing capital appreciation over the short to medium term. If the economy is truly recovering, than these types of stocks will help push it along. The previous exchange traded funds are a great way to quickly add to the investing style.


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