ETFs
3 Powerful Growth ETFs with a History of Outperformance Against the S&P 500
Investing in exchange traded funds (ETFs) is one of the simplest and easiest ways to build wealth in the stock market. An ETF is a collection of securities grouped together into a single investment, making it almost easy to achieve diversification and reduce your risk.
But just because ETFs require less effort than individual stocks doesn’t mean they generate below-average returns. Although all ETFs are different, some have a track record of beating the market and could help you increase your income.
1. Vanguard Growth ETF
THE Vanguard Growth ETF (NYSEMKT: VUG) is a large-cap growth fund containing stocks with above-average earnings potential. It includes 200 stocks from various sectors, although just over 56% of the fund is allocated to stocks in the technology sector.
Growth ETFs, in general, tend to carry more risk than general market funds like S&P500 AND F. However, because the Vanguard Growth ETF only includes large-cap stocks (many of which come from industry-leading companies like Apple, AmazonAnd Nvidia), which can help you limit your risk compared to funds containing smaller, more volatile stocks.
Over the past 10 years, this ETF has significantly outperformed the S&P 500, posting total returns of more than 272%, compared to 176% for the index during that period.
There is no guarantee that this ETF will continue to generate similar returns over time. But given that it has a long history of beating the market, you could get well-above-average returns if it continues on this path.
2. Schwab US Large Cap Growth ETF
THE Schwab US Large Cap Growth ETF (NYSEMKT: SCHG) is similar to the Vanguard Growth ETF, but with greater diversification. This fund contains 249 stocks (compared to 200 for Vanguard), and only 46% of this ETF is allocated to technology stocks (compared to 56% for Vanguard).
Greater diversification can be a good thing or a bad thing. On the one hand, investing in a wider variety of stocks and sectors can limit your risk, especially during periods of volatility. But it can also dilute your income, especially when you invest in hundreds of stocks. It is possible to over-diversifywhich can limit your returns without adding any risk reduction benefits.
In the case of this ETF, greater diversification does not appear to harm its performance. The fund has generated total returns of 307% over the past 10 years, even slightly outperforming the Vanguard fund during this period.
Additionally, one of the advantages that Schwab and Vanguard ETFs share is their low expense ratio. Both funds have an expense ratio of 0.04%, meaning you’ll pay $4 per year in fees for every $10,000 in your account. This is much lower than many other funds, which could save you thousands of dollars over time.
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3. Invesco QQQ Trust
Invesco QQQ Trust (NASDAQ:QQQ) contains 101 stocks, with 59% allocated to the technology sector. This ETF was launched in 1999, giving it a much longer history than the Vanguard and Schwab funds (founded in 2004 and 2009, respectively).
Although a larger allocation to technology stocks and a smaller number of holdings overall may increase this fund’s risk, it is also the best performing of the three. Over the past 10 years, it has generated total returns of nearly 404%, compared to 272% for Vanguard, 307% for Schwab and 176% for the S&P 500 during that period.
One potential downside of this ETF is its relatively high expense ratio of 0.20%. While that doesn’t seem like a significant difference compared to Vanguard and Schwab’s 0.04%, if you ultimately have hundreds of thousands of dollars in your portfolio, it adds up quickly.
This ETF may also be more risky due to its heavy reliance on technology stocks. It has a history of significantly outperforming the market during strong economic times, but it has also been hit hard during downturns. Whether this trade-off is appropriate will depend on your risk tolerance.
Investing in growth ETFs can be a fantastic way to build long-term wealth with less effort than purchasing individual stocks. Considering your risk tolerance and overall goals will make it easier to decide which investment is best for your portfolio.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Katie Brockman has positions in Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool has positions in and recommends the Amazon, Apple, Nvidia, and Vanguard Index Funds-Vanguard Growth ETFs. The Motley Fool has a disclosure policy.
3 Powerful Growth ETFs with a History of Outperformance Against the S&P 500 was originally published by The Motley Fool