Investing in growth stocks can be exciting, rewarding and potentially devastating. It simply comes down to looking for several key metrics including consistent revenue and net income growth (especially revenue growth), a healthy balance sheet and strong cash flow generation. It also helps if the company is in line with consumer and/or industry trends and its stock has appreciated over the past year. Momentum matters. 

The problem with this approach is that it’s very time consuming. Can you imagine looking at the aforementioned metrics for every stock in the Russell 2000 Index? The vast majority of investors don’t have the time. It’s much easier to invest in a growth exchange-traded fund (ETF), which will offer diversification by investing in a broad range of growth stocks. Over the long haul, the winning holdings should offset the losing holdings, providing you with a positive return. (For more, see: Value vs. Growth ETFs: How Do You Choose?)

The only potential problem is that most growth stocks don’t hold up well in bear market environments. If you’re concerned about current economic and market conditions, this might be too risk-on for you. That said, if you’re a savvy investor you can allocate some capital to one of the growth ETFs below while saving the majority of your capital for cheaper prices. If those cheaper prices present themselves, approach with caution and do not attempt to pick a bottom. You’re much better off waiting for confirmation of a rebound. If those cheaper prices never arrive, then you have a small win and there’s nothing wrong with that.

5 Growth ETFs

iShares Edge MSCI USA Momentum Factor (MTUM)

Purpose: Tracks the MSCI USA Momentum Index

Net Assets: $1.27 billion

Average Daily Trading Volume (past three months): 228,755

Expense Ratio: 0.15%

Inception Date: April 16, 2013

Performance Since Inception: 47.13%

Dividend Yield: 1.07%

Top 3 Holdings (% of net assets):

Amazon.com, Inc. (AMZN) 5.08%

Facebook, Inc. (FB) 5.00%

AT&T, Inc. (T) 4.96%

iShares Russell 1000 Growth (IWF)

Purpose: Tracks the Russell 1000 Growth Index

Net Assets: $29.41 billion

Average Daily Trading Volume (past three months): 1.6 million

Expense Ratio: 0.20%

Inception Date: May 22, 2000

Performance Since Inception: 21.68%

Dividend Yield: 1.39%

Top 3 Holdings (% of net assets):

Apple Inc. (AAPL) 5.46%

AMZN 2.61%

FB 2.44%

Vanguard Growth ETF (VUG)

Purpose: Tracks the CRSP U.S. Large Cap Growth Index

Net Assets: $50.59 billion

Average Daily Trading Volume (past three months): 642,480

Expense Ratio: 0.08%

Inception Date: January 26, 2004

Performance Since Inception: 116.28%

Dividend Yield: 1.27%

Top 3 Holdings (% of net assets):

AAPL 5.60%

FB 2.91%

AMZN 2.88%

iShares Russell 2000 (IWM)

Purpose: Tracks the Russell 2000 Index

Net Assets: $26.38 billion

Average Daily Trading Volume (past three months): 29 million

Expense Ratio: 0.20%

Inception Date: May 22, 2000

Performance Since Inception: 141.29%

Dividend Yield: 1.46%

Top 3 Holdings (% of net assets):

Steris (STE) 0.35%

CubeSmart (CUBE) 0.33%

Treehouse Foods, Inc. (THS) 0.32%

iShares S&P Small-Cap 600 Growth (IJT)

Purpose: Tracks the S&P SmallCap 600 Growth Index

Net Assets: $3.17 billion

Average Daily Trading Volume (past three months): 104,117

Expense Ratio: 0.25%

Inception Date: July 24, 2000

Performance Since Inception: 225.09%

Dividend Yield: 1.22%

Top 3 Holdings (% of net assets)

Piedmont Natural Gas Co. Inc. (PNY) 1.55%

Take-Two Interactive Software Inc. (TTWO) 1.05%

Blackbaud Inc. (BLKB) 0.94%

The Bottom Line

Growth stocks should be seen as high risk/high reward. If you want to reduce risk via diversification, then you might want to consider one of the growth ETFs above. (For more, see: IWF: iShares Russell 1000 Growth ETF.)

Dan Moskowitz does not have any positions in any of the ETFs or stocks listed above. 

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