Both ETFs come with risk, but one of these puts its faith in some of the world’s top companies.
People tend to gravitate toward a certain investing style. Some prefer guaranteed income with dividends, some prefer to find undervalued stocks, and some prefer to invest in companies with high growth potential. Neither style is better than the others, but growth investing, in particular, has been popular in recent years.
Growth stocks are often a risk-reward trade-off. These companies have shown they can outpace their respective industries, but you usually have to stomach a lot more volatility along the way. Of course, there are exceptions, but that’s generally how it plays out.
I often recommend that people interested in growth stocks consider investing in an exchange-traded fund (ETF). The stock market is full of great growth-focused ETFs, as well as not-so-great ones. Below are two popular growth ETFs that fit both descriptions. Consider investing in one and avoiding the other.
The one growth ETF to buy hand over fist
The Vanguard Growth ETF (VUG 0.98%) focuses on large-cap growth stocks, which is why I prefer it. In recent years, larger companies (especially tech) have shown they can grow just as fast as smaller ones, with much less risk. That’s not to say this ETF is low-risk or immune to volatility, but it’s being led by some of the world’s most reliable and dynamic companies.
This ETF is around 60% tech companies, with the “Magnificent Seven” all in its top 10 holdings. That’s given the ETF a boost over the past decade, achieving a 250% return vs. 170% for the S&P 500. When you invest in a growth ETF, you expect to receive market-beating results, and this ETF has provided that since it was created in January 2004.
One downside to the ETF is that Apple, Microsoft, and Nvidia combine to make up over 35% of it. That’s a lot of concentration for a 188-stock ETF. That said, if you’re looking for large, world-class companies that can still outperform many smaller companies while having market caps in the trillions, these three fit the bill.
LLY data by YCharts
This ETF has a solid foundation of companies leading the charge and is in a good position to continue its momentum when considering the industries in which its top companies operate. They touch virtually every aspect of tech while covering areas like pharmaceuticals (Eli Lilly), retail (Costco Wholesale), and digital payments (Visa and Mastercard).
These companies don’t generally get as much attention as the Magnificent Seven, but they’ve all done well in recent years and have good growth opportunities ahead of them.
One growth ETF to avoid at this time
Cathie Wood has become one of the best-known names on Wall Street, familiar to many for her big bets on high-flying growth stocks through her company, ARK Invest.
The company’s flagship fund, the ARK Innovation ETF (ARKK 1.70%), became one of the most popular on the stock market during the early parts of the COVID-19 pandemic. Unfortunately, the ETF has lost close to three-fourths of its value since reaching a peak in February 2021.
ARKK data by YCharts
This ETF focuses on companies that fit ARK Invest’s description of “disruptive innovation.” Its companies operate in industries like electric vehicles, cryptocurrency and digital payments, cloud computing, biotechnology, and a handful of others.
I’m a fan of many of the ETF companies’ missions. It undoubtedly contains some great companies that are helping to shape the future. I’ll give credit where it’s due. However, I’m not a fan of the ETF as a collective, primarily because of its cost and high volatility (by even growth stock standards).
This ETF’s expense ratio is 0.75% compared to the Vanguard Growth ETF’s minuscule 0.04%. It may “only” be a 0.71% difference, but it matters a lot when you’re investing over the long run. For perspective, imagine you invest $500 into each ETF and average 10% annual returns over 25 years. Here’s roughly how your fees would compare:
| Expense Ratio | Amount Paid in Fees | Ending Investment Value |
|---|---|---|
| 0.04% | $3,500 | $586,500 |
| 0.75% | $62,600 | $527,400 |
Table by author. Fees and investment value rounded down to the nearest hundred.
It’s bad enough that the ARK Innovation ETF has underperformed the market over the past decade. However, paying a premium fee to hold the underperforming ETF is adding insult to injury. There are plenty of growth stocks on the market with better historical results (although the future is what matters) and much cheaper.
I like the Vanguard Growth ETF because it has shown to be more stable and puts investors in a position to save a lot of the gains they receive.
Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Costco Wholesale, Mastercard, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.