Growth ETF vs. value ETF: What’s the difference?

Growth ETF vs. value ETF: What’s the difference?

As you build your investment portfolio, you will likely come across two widely followed styles — value and growth. In many ways, the option you choose will depend on your specific needs and financial objectives.

While it might seem complex, there are exchange-traded funds (ETFs) set up to help you diversify and streamline the process.

Here’s what you need to know about these types of investments and how they might fit into your strategy. Topics covered on this page

Growth ETF investing

Growth investing is a strategy focused on finding stocks where the underlying companies are expected to grow sales and profits at an elevated rate and generate above-average returns.

Whereas value investors search for bargains and steady income, growth investors are willing to pay a premium for shares of companies that could significantly outperform in the future. Often, these names are part of industries at the forefront of innovation like technology and biotech. Because their services are nascent, they tend to be young companies with the potential to disrupt entire industries.

Some well-known growth stocks include Alphabet (GOOGL), Amazon (AMZN), Tesla (TSLA) and Netflix (NFLX). As these companies dominated their respective industries, their shares experienced parabolic moves, capturing massive gains for early investors.

Of course, plenty of other growth stocks have experienced rapid gains in prices, only to see their shares eventually sink as their business prospects never materialized. That’s one reason growth investing can be potentially more volatile than value investing.

By default, growth investors are typically less concerned about metrics like dividend payments, debt levels or cash at hand, as they expect growth companies to reinvest in their businesses heavily. However, as time goes on, these factors become more prevalent.

The strategy can be attractive to younger investors as they have additional time to stay with an investment through any short-term declines in price. But even for other age groups, owning a portion of growth stocks can maximize potential gains and serve as a diversification factor.

Data below is as of Oct. 21, 2021. Top growth ETFs

Retail investors have access to a plethora of options targeted to growth investments across sectors and industries. Below we highlight some of the most popular. Vanguard Growth ETF (VUG)

VUG is one of the biggest growth ETFs with around $87 billion in assets under management. This passively managed fund selects large-cap companies with growth characteristics.

Among its top holdings, the fund invests in Apple (AAPL), Microsoft (MSFT) and Facebook (FB). All of the fund’s holdings are US companies. It has an expense ratio of 0.04 percent. iShares Russell 1000 Growth ETF (IWF)

Another popular option is IWF, which manages about $76 billion. With this fund, investors have exposure to US growth companies in various market-cap sizes.

Some of its top holdings include shares of NVIDIA (NVDA), Tesla (TSLA) and Visa (V). 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 about $38 billion in assets under management. As a benchmark, the fund owns stocks of S&P 500 companies with certain growth characteristics such as sales growth.

About 55 percent of its investments are in technology companies. Among its top holdings, the fund owns shares of Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN). 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 searching for buying opportunities, value investors often pay special attention to metrics like stable cash flows, earnings, dividends, and minimal debt as critical indicators. Then, they use that information to gauge a company’s intrinsic value with its future earnings potential.While conducting fundamental research, value investors also look at overall industry metrics to discover additional insights. For example, if Coca-Cola’s (KO) shares appear undervalued, they would evaluate metrics in the consumer staples sector, along with direct competitors such as PepsiCo. This type of analysis ensures 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 seeking to hit a home run. Instead, they aim to generate consistent returns as value stocks tend to be less volatile.Consider famed value investor Warren Buffett, whose investment philosophy relies on patience, sound analysis and never acquiring assets in business models he doesn’t understand. For Buffett, this simple investment approach paid off. Since 1965, the company he runs, Berkshire Hathaway, has generated a compound annual gain of 20 […]

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