by Will Ashworth | December 3, 2013 12:39 pm
While investors in the past five years have favored value stocks over growth stocks, Mad Money’s Jim Cramer believes you should hold at least one of the hottest growth stocks in a diversified portfolio.
And I agree. But deciding which of the many up and coming stocks is actually one of the best stocks to buy is anything but an easy task. There are so many growth stocks to choose from, and so many pros and cons to each pick.
So rather than sorting through a stack of growth stocks to find the perfect one, why not just find the best ETF to do the job for you? It’s not just easier, but also safer.
Here are three of the best ETFs to own when it comes to growth stocks. Instead of having to decide from countless up and coming stocks to choose just one, all you have to do is pick the best ETF of growth stocks from these three.
Take a look:
One obvious place to look for growth stocks is the IPO market, considering most new-to-the-market companies are naturally up and coming stocks. That makes the best ETF for growth stocks the First Trust US IPO Index Fund (FPX). The fund’s top 10 holdings account for nearly half of its portfolio, and the top three growth stocks in the fund are Facebook (FB), AbbVie (ABBV), and General Motors (GM).
This is one of the best ETF investments because it tracks the performance of the IPOX-100 US Index, which represent 100 of the largest, best-performing U.S. IPOs during their first 1,000 trading days.
In the past five years FPX has achieved an annualized return of almost 30%. Given that performance, the expense ratio of 0.60% is reasonable for this bundle of hot up and coming stocks. Plus, it’s one of the best ETF picks for growth stocks since Morningstar rates it five stars over three- and five-year periods.
In terms of sector exposure, consumer discretionary growth stocks account for the biggest weighting at 26% of the fund, followed by information technology, energy and health care, respectively. These four sectors represent 79% of the growth stocks in FPX’s 100-stock portfolio. Generally, a portfolio of growth stocks is going to have significant representation from all four of these sectors.
When it comes to funds focusing on growth stocks, FPX has to be considered one of the best ETF investments out there.
A big reason we are looking at the best ETF investments over mutual funds is the cost. Expense ratios for some of the best ETFs full of growth stocks run as low as 0.07% annually. While some have lower fees than this next pick, none provide better value than the Vanguard Growth ETF (VUG). It invests in 346 large-cap growth stocks including Apple (AAPL), Google (GOOG) and IBM (IBM).
This bundle of growth stocks is the best ETF for folks who want a more diversified investment. VUG seeks to replicate the performance of the CRSP US Large Cap Growth Index.
The index uses six different factors when ranking large-cap growth stocks. A few are its estimated future growth in earnings, historical earnings and sales growth, the rate at which these growth stocks invest in new assets and the overall return on those assets. The methodology is indeed quite thorough — making this one of the best ETFs.
The typical equity in this group of up and coming stocks has a median market cap of $52 billion, price-to-earnings and price-to-book ratios of 23 and 4.3 respectively, an earnings growth rate of 16.6% annually and a turnover rate of 21%. That means the fund turns the entire portfolio of growth stocks every five years.
Performance also supports that the VUG is one of the best ETF investments for growth stocks. Although the 2008 market correction feels fresh in our minds, this ETF has had eight winning years out of nine since its inception. Investing in growth stocks over the last decade has been rewarding and could become even more so in the years ahead.
The best ETF for growth stocks when it comes to performance, though, is the Guggenheim S&P MidCap 400 Pure Growth ETF (RFG). It boasts the best five-year performance record of any ETF with assets greater than $500 million investing in growth stocks.
Of course, past performance isn’t indicative of future performance. But this is also one of the best ETFs because the management expense ratio is a very reasonable 0.35%. And many experts suggest low fees are the best gauge of future performance.
Plus, RFG is one of the best ETF investments, whether you’re looking at growth stocks or other flavors. One key reason is the fact it invests in mid-cap growth stocks. These up and coming stocks are the sweet spot of investing since they’re still growing handily but are also stable enough to withstand economic downturns.
Consumer discretionary and information technology growth stocks dominate this top ETF. The largest holding by far is 3D Systems (DDD), the 3D printing company that’s taking the world by storm. DDD stock is up 115% year-to-date and over 100% annually over the past five years.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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