As you build your investment portfolio, you’ll likely encounter two common styles: value and growth. In many ways, the option you choose depends on your specific needs and financial goals.
While it may seem complicated, there are exchange-traded funds (ETFs) that can help you diversify and streamline the process.
Here’s what you need to know about these types of investments and how they can fit into your strategy.
Growth ETF Investing
Growth investing is a strategy that focuses on finding stocks where the underlying companies are expected to grow their sales and profits at a high rate and generate above-average returns.
While value investors look for bargains and stable income, growth investors are willing to pay a premium for shares of companies that could significantly outperform in the future. These names are often part of sectors that are at the forefront of innovation, such as technology and biotechnology. Because their services are still in their infancy, they are often young companies with the potential to disrupt entire industries.
Some well-known growth stocks are Alphabet (GOOGL), Amazon (AMZN), Tesla (TSLA) and NVIDIA (NVDA). As these companies dominated their respective industries, their stocks underwent parabolic moves, delivering huge profits for early investors.
Of course, plenty of other growth stocks have enjoyed rapid price increases, only to see their shares ultimately sink because their business prospects never materialized. That is one of the reasons why growth investing can potentially be more volatile than value investing.
By default, growth investors tend to be less concerned about metrics like dividend payments, debt levels or available cash because they expect growth companies to reinvest heavily in their businesses. However, as time goes by, these factors become more and more common.
The strategy can be attractive to younger investors because they have extra time to stick with an investment despite any short-term price declines. But even for other age groups, owning some growth stocks can maximize potential profits and serve as a diversification factor.
Top Growth ETFs
Retail investors have access to a plethora of options focused on growth investments across different sectors and industries. Below we highlight some of the most popular. The data below is from October 10, 2023.
Vanguard Growth ETF (VUG)
VUG is one of the largest growth ETFs with approximately $173 billion in assets under management. This passively managed fund selects large-cap companies with growth characteristics.
Among the top holdings, the fund invests in Apple (AAPL), Microsoft (MSFT) and Amazon. Nearly all of the fund’s investments are American companies. It has an expense ratio of 0.04 percent.
iShares Russell 1000 Growth ETF (IWF)
Another popular option is IWF, which manages approximately $69 billion. With this fund, investors have exposure to American growth companies with different market capitalizations.
Top holdings include shares of Apple, Microsoft, Amazon and NVIDIA. It has an expense ratio of 0.19 percent.
iShares S&P 500 Growth ETF (IVW)
IVW is one of the most established growth ETFs on the market. The fund has $34 billion in assets under management. The fund owns shares of S&P 500 companies with certain growth characteristics, such as revenue growth.
About 36 percent of investments are in technology companies. Among its top holdings, the fund holds shares of Apple, Microsoft and NVIDIA. It has an expense ratio of 0.18 percent.
Value ETF Investing
Value investing is a strategy that focuses on finding undervalued stocks based on a company’s fundamentals.
When looking for buying opportunities, value investors often pay special attention to metrics such as stable cash flows, earnings, dividends and minimal debt as critical indicators. They then use that information to measure a company’s intrinsic value and future earnings potential.
When conducting fundamental research, value investors also look at broad industry metrics to uncover additional insights. For example, if Coca-Cola (KO) shares appear undervalued, they would evaluate the numbers in the consumer staples sector, along with direct competitors such as PepsiCo (PEP). This type of analysis guarantees an apples-to-apples comparison.
Like bargain hunting, value investors want to scoop up shares of companies they think are “cheap.” Often they are not looking for a home run. Instead, they aim to generate consistent returns because value stocks tend to be less volatile.
Consider famed value investor Warren Buffett, whose investment philosophy rests on patience, sound analysis, and never acquiring assets in business models he doesn’t understand. For Buffett, this simple investment approach has paid off. Since 1965, the company he runs, Berkshire Hathaway, has generated revenue compound annual profit of 20 percentabout double the return of the S&P 500 index.
Value investors like Buffett are always looking for companies with solid business models that trade at a discount, and that’s what value ETFs aim to provide.
Exchange traded funds are a low-cost option for retail investors to diversify and access a wide range of investment themes, such as value investing.
Through these investment vehicles, you own a basket of stocks managed by a professional, eliminating the need to sift through research reports, balance sheets, or perform time-consuming analysis.
When you purchase a value ETF, a fund manager can only buy or sell securities that meet predetermined criteria set forth in a prospectus. Such documents are available for every ETF and investment fund. By reviewing this information before investing, you can determine whether the investment criteria, asset allocation, portfolio holdings, management fees and other features align with your financial objectives.
A prospectus acts as a binding contract and prevents fund managers from deviating from what they have promised. So when you invest in a value ETF, you can be confident that only companies with specific characteristics will be included.
Top Value ETFs
As the ETF market continues to grow, market participants have access to a variety of options aimed at valuing investors. Some of these investment strategies are broad, while others are niche and very specific. Below we highlight some of the most popular.
Vanguard Value ETF (VTV)
VTV is the most prominent value ETF with $144 billion in assets under management. This passively managed fund selects undervalued shares in large companies from different sectors.
Among its top holdings, the fund owns securities of Exxon Mobil (XOM), UnitedHealth Group (UNH) and Buffett’s company Berkshire Hathaway (BRK.B). More than 99 percent of the fund’s investments consist of American companies. It has an expense ratio of 0.04 percent.
iShares Russell 1000 Value ETF (IWD)
Another popular option: IWD has approximately $48 billion in assets under management. The fund selects undervalued companies from the Russell 1,000 index, which tracks U.S. companies beyond large-cap names, including mid- and small-cap companies.
Some of its top holdings include shares of Berkshire Hathaway, JPMorgan Chase (JPM), and Exxon Mobil (XOM). It has an expense ratio of 0.19 percent.
Vanguard Small-Cap Value ETF (VBR)
VBR provides exposure to an index of US small-cap companies from various sectors. The fund has approximately $46 billion in assets under management.
About 19 percent of investments are in financial companies. Among its top holdings, the fund owns shares of Builders FirstSource (BLDR), Bunge (BG), and IDEX Corp (IEX). The expense ratio is 0.07 percent.
Growth or Value ETFs: Which Are Better?
Depending on your financial goals, asset allocation and risk tolerance, there are different strategies for investing in value and growth stocks. Your level of financial knowledge and commitment to your investments also plays a factor.
For most investors, passively managed ETFs are probably the best option. Intended as a buy-and-hold strategy, they provide automatic diversification and eliminate the need for investors to consistently monitor market developments.
Once you determine your financial goals and risk tolerance, you can use passively managed ETFs to invest in value and growth stocks. The key for investors is to understand how much of each strategy makes sense for their portfolio and ensure these allocations are flexible as market developments take place.
For example, you may initially decide to invest 15 percent of your portfolio in value ETFs and 10 percent in growth ETFs. As changes occur in the stock market, these weightings will likely fluctuate. By periodically reviewing your investments, you can ensure that your investments align with your financial goals.
When the time comes, follow our guide on finding ETFs that suit your financial needs and the key features to consider.
Ultimately, value and growth stocks have a place in many investors’ portfolios. How much you decide to own in each category depends on your financial situation and the level of risk you are willing to take.
What to look for when choosing the best ETF
Cost ratio
As an ETF investor, you should pay close attention to a fund’s expense ratio, which is expressed as a percentage of the fund’s assets. Some ETFs have expense ratios close to zero, while others can be 0.5 percent or more. A 0.30 percent ratio means you pay $30 annually for every $10,000 you invest in the ETF. This may not sound like much, but fees can eat away at your returns over time, so don’t forget about fees, even though most funds charge less than 1 percent annually.
The fund’s investments: In which part of the market does the fund invest?
Keep in mind that ETFs themselves are not what you are investing in, but rather the securities that the ETFs hold. The ETF is just the vehicle: you want what’s in it. This means that stock ETFs will hold shares of different companies, and bond ETFs will hold the debt of different companies or governments. It’s important to understand an ETF’s underlying investments before making an investment to ensure the fund is aligned with your objectives. For example, if you’re looking for broad diversification, you’d probably be a good fit for an index fund that tracks a broad benchmark, such as the S&P 500.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
