Growth ETFs are funds that hold high-growth companies. High growth companies prioritize speedy revenue growth and earnings growth over regular and reliable dividend payments to shareholders. The thinking is that growth companies that retain and invest their earnings will do better over the longer term than companies who pay out those earnings to shareholders. A popular growth ETF is the iShares Russell Growth Index (PCX:IWF), which is a fund that prioritizes earnings growth.
One way to measure investor concern about market direction is the movement volatility index or VIX, which tracks the price of options on the ubiquitous S&P 500 Index. Investors use put options on the S&P 500 Index to protect against losses. If these options are expensive this suggests that investors are willing to pay up to protect portfolios.
Growth ETFs tend to be higher beta than value funds. This means that in strong markets they typically outperform the benchmark. In weaker markets they tend to underperform. Growth is outperforming value across market capitalization.
Although strong earnings are important to classifying a company as a growth stock and dividends are important to classifying a company as a value, there are no strict definitions. An individual company can be expressed as either a growth or a value stock. Holdings in growth and value funds overlap. Oil major Exxon Mobile (NYSEArca:XOM) for example is the largest holding in both IWF and IWD shown in the first chart above.
Growth ETFs tend to have more exposure to the technology sector, less to industrials and financials. Historically, strong technology performance is another predictor of the relative strength of growth funds. In the 1990s technology outperformed the broad market. Growth beat value. At the height of the tech bubble, the P/E ratios of growth funds were twice that of value funds. Over the last decade, the PE ratio of technology companies contracted. Value outperformed growth.
A general slowdown in the U.S. equity markets over the past decade and the trend to lower interest rates has helped value to outperform. Growth ETFs typically pay lower dividends (IWD's dividend is currently 50% higher than IWF). Although this amounts to about 100 basis points, the certainty counts. In a slow growth environment of low interest rates, every basis point counts.
The stubborn underperformance of growth over the last decade recalls research by Fama and French published in the mid 1990s. In a famous study Fama and French panned growth stocks. They suggested that growth over the longer term delivers lower returns at higher risk than value funds. (They also singled out small cap growth as an especially unwelcome asset class, both volatile and low performing.) Ironically, no sooner than they finished their study, growth stocks when on an extended run, far outperforming value.
There a many types of growth ETFs, including fundamental funds, leverage funds and short ETFs that are useful for traders. The plain vanilla growth funds are differentiated primarily in terms of the market cap size of their holdings and their exposure to small companies. Growth investors who wish to overweight a range of certain sized growth companies should find an ETF that matches that range. The list below presents traditional growth ETFs, the company size targeted in their holdings, as well as their fees:
Traditional "Plain Vanilla" Growth ETFs
Fundamental Growth ETFs
There are also several ETFs based on proprietary enhanced or fundamental indexes. Fees are higher.
And finally, short and leverage growth ETFs suitable for speculative traders looking for a short-term play:
Short/Leverage Growth ETFs