Growth and value are two distinctly different investing approaches and investors should naturally expect different returns from the two over time, but this is getting crazy. “This” being the chasm between the two, a trend has been apparent for much of the past decade.
Over the past three years, the S&P 500 Growth Index is up 70.3%, more than double the 34.2% gain for the S&P Value Index over the same period. Additionally, the growth benchmark has only been 210 basis points more volatile than its value rival over that span, confirming superior risk-adjusted returns. With names such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) accounting for significant percentages of the broader market’s returns, it’s hard to envision the growth/value gap narrowing anytime soon.
Growth “stock prices are high relative to their sales or profits. This is due to expectations from investors of higher sales or profits in the future, so expect high price-to-sales and price-to-earnings ratios,” according to Fidelity.
That shouldn’t be off-putting to investors because as we’ve seen time and again, some growth stocks do deliver big growth while their multiples get richer and richer.
For investors that don’t want to pick individual stocks, here are some big growth exchange traded funds to consider.
SPDR S&P Software & Services ETF (XSW)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
Technology is a growth epicenter, but if investors aren’t afraid to take on higher valuations, software is a good place to start. The SPDR S&P Software & Services ETF (NYSEARCA:XSW) is a fine big growth ETF to consider, with a comfortable price-to-earnings ratio of 27.2x that isn’t alarmingly high. Remember what you’re looking for when investing for growth: earnings and revenue beats, something the software industry has track record of delivering.
“The Software & Services industry has historically delivered stronger and more consistent earnings beats than the broader market, as businesses quicken the pace of transitioning to cloud-based software solutions,” said State Street in a recent note.
XSW is an equal-weight ETF, so there’s limited single stock risk, which is to say large- and mega-cap tech names don’t dominate this fund’s 164-stock roster. And yes, there’s still growth to be had here this year as enterprise software spending rises.
“Per Gartner’s latest IT spending forecast for 2020, enterprise software spending is expected to grow more than 10% in the coming two years, as larger companies increasingly adopt cloud-based software solutions,” notes State Street.
ARK Next Generation Internet ETF (ARKW)
Expense ratio: 0.75%
There are traditional internet funds, and then there’s the ARK Next Generation Internet ETF (CBOE:ARKW). ARKW is often highlighted because it has one of the largest weights to Tesla (NASDAQ:TSLA) among all ETFs, but there’s a lot more to the fund’s story.
ARKW isn’t your run-of-the-mill internet fund, so don’t expect significant exposure to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and the like. However, that doesn’t diminish ARKW’s big growth ETF status. In addition to its 10.14% weight to Tesla, ARKW has an 8.22% weight to Square (NYSE:SQ), cementing the fund’s status as a valid, though not dedicated, fintech play.
“According to ARK’s research, digital wallets will be valued at a premium to retail banks and, thanks to their low cost of customer acquisition, will offer banking services to low-income earners in a way that traditional banks cannot,” said ARK Invest in a recent report.
ARKW also offers e-commerce and streaming entertainment exposure, diversifying the mix with domestic and foreign companies.
Invesco S&P 500 Pure Growth ETF (RPG)Expense ratio: 0.35%
The Invesco S&P 500 Pure Growth ETF (NYSEARCA:RPG) tracks the S&P 500 Pure Growth Index, which is a different animal than the aforementioned S&P 500 Growth Index. RPG gauges growth “by the following risk factors: sales growth, earnings change to price and momentum,” according to Invesco.
As is the case with other standard big growth ETFs, RPG is significantly overweighted for technology, as that sector represents 38.23% of the fund’s weight. While the likes of Apple, Microsoft and other mega-cap technology fare reside in RPG, none of the fund’s 104 holdings command weights greater than 2%, so single stock risk remains minimal here.
Relative to some of the other big growth ETFs on the market, RPG is somewhat attractively valued, with a price-to-earnings ratio of 23.26x, and its return on equity (ROE) of 37.11% is nothing to scoff at. The rub with RPG is timing when it will and won’t lag the traditional S&P 500 Growth Index, which this fund has been doing for at least three years now.
NuShares ESG Large-Cap Growth ETF (NULG)
Expense ratio: 0.35%
Investors can embrace environmental, social and governance (ESG) virtues with big growth ETFs such as the NuShares ESG Large-Cap Growth ETF (CBOE: NULG). In fact, given the significant dependence of many ESG strategies on large- and mega-cap technology and communication services stocks, combining ESG and growth is rather practical.
Those new to ESG investing often worry about leaving returns on the table compared to traditional equity strategies, but NULG dispels that notion: over the past year, the NuShares product is beating the S&P 500 Growth Index by more than 1,000 basis points. NULG’s qualifiers include avoiding “controversial businesses” and those with heavy carbon footprints.
Like other funds in its category, NULG features a big tech overweight (almost 34%) and Microsoft apparently scores well by this ETF’s ESG criteria, given that MSFT is almost 10% of the roster and more than double the weight assigned to the second-largest holding.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
Expense ratio: 0.60%
Wait, real estate is a defensive sector you say? The Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEARCA:INDS) is an example of a big growth ETF in a defensive group. For investors looking for an entry into e-commerce with decent yield (2.16%) without Amazon’s exorbitant price, INDS makes a lot of sense as real estate expands into the booming world of online retail.
Fulfillment and logistical demands created by the likes of Amazon and Shopify (NYSE:SHOP) are met by INDS components, putting this big growth ETF at the forefront of, well, big growth. In other words, there is a perfectly plausible, fundamental reason why INDS is beating the largest traditional real estate ETF by an almost 2-to-1 margin over the past and why that out-performance can continue this year.
As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.