Growth Stock ETFs

Growth Stocks

The definition of a growth stock may change according to changes in market conditions and the economy.  But typically, stocks of companies characterized by high revenue multiples, sometimes even negative earnings are known as growth stocks or high growth stocks.  Their share prices rise mainly on the basis of their earning potential.  These companies generally do not pay any dividends as the earnings are ploughed back into the company.  Most of these companies are in the nascent stage of their life cycle and hold great promise.

Exchange Traded Funds (ETFs)

We can understand the concept of exchange traded funds also known as ETFs by a simple example.  Consider three companies X, Y and Z trading on an exchange.  There is a fund called M which has invested in these companies by buying their shares.  If M is an exchange traded fund, units of M can also be bought and sold on the exchange.  Thus, an ETF is nothing but a basket of stocks which can be traded on the exchange just like shares.

Growth Stock ETFs (Exchange Traded Funds)

Exchange traded funds which look for and invest in the fastest growing companies on the market are called growth stock ETFs.  Investors who invest in these ETFs are not satisfied with modest returns on their investments.  So the fund managers of these exchange traded funds take a higher risk and attempt to build a portfolio of companies whose share prices have great momentum and a high rate of appreciation.

Reasons for Investing in Growth Stock ETFs (Exchange Traded Funds)

Investors today have various options for investing.  Some of them may seem very attractive but may be fought with great risk.  For instance, investing in emerging markets – very popular with investors till recently – is highly risky.  But inflationary conditions of the economy force investors to look for investments, which at a reasonable risk will help their capital to appreciate.  Investing in growth stock ETFs would be a good option for such investors.

There are different kinds of Growth Stock ETFs (Exchange Traded Funds) based on the Market Capitalization of the companies they invest in.  Market capitalization means the total number of shares of a company multiplied by the current price.

  • Large Cap Growth Stock ETFs

These exchange traded funds invest in companies whose market capitalization is very high and who have great potential for growth.

  • Mid Cap Growth Stock ETFs

These ETFs invest in mid cap companies who are likely to do very well in the future.

  • Small Cap Growth Stock ETFs

These ETFs invest in companies with low market capitalization and who are in the initial stages of growth.

Growth Stock ETFs (Exchange Traded Funds) vs.  Value Stock ETFs

  • Value stock ETFs invest in companies which have low price to earnings ratios and high dividend yields.  Growth stock ETFs on the other hand invest in stocks which have or are likely to have very high earnings though they would not pay out any dividend from those earnings.
  • Growth stock ETFs invest in companies which are at a very early stage in their life cycle.  Value stock ETFs invest in companies which are in the stage of maturity.
  • Investing in growth stock ETFs is more risky than investing in value stock ETFs.

Often, there is no clear demarcation between growth and value stocks.  So investments of growth stock ETFs (exchange traded funds) and value stock ETFs may overlap unless they are “pure growth stock ETFs” or “pure value stock ETFs”.

The advantages of growth stocks vis-à-vis value stocks have been debated for a long time.  But studies indicate that value stock investing has given better returns over a period of time than growth stock investing.  Investing in growth stock ETFs therefore, may be less beneficial than investing in value stock ETFs.