1 growth ETF to buy Hand Over Fist and 1 to avoid

People tend to gravitate towards a certain style of investing. Some prefer guaranteed dividend income, some prefer to find undervalued stocks, and some prefer to invest in companies with high growth potential. No one style is better than the others, but growth investing, in particular, has been popular in recent years.

Growth stocks are often a risk-reward trade-off. These companies have proven that they can outperform their respective industries, but you usually have to endure a lot more volatility along the way. Of course, there are exceptions, but in general this is how it works.

I often recommend that people interested in growth stocks consider investing in an exchange-traded fund (ETF). The stock market is full of great growth-focused ETFs, as well as some not-so-great ones. Below are two popular growth ETFs that fit both descriptions. Consider investing in one and avoiding the other.

The growth ETF to buy outright

The Vanguard Growth ETF (VUG 0.09%) it focuses on large-cap growth stocks, which is why I prefer it. In recent years, larger companies (especially tech companies) have shown that they can grow just as fast as smaller ones, with much less risk. That doesn’t mean this ETF is low-risk or immune to volatility, but it’s run by some of the most reliable and dynamic companies in the world.

This ETF is around 60% technology companies, with the “Magnificent Seven” all in its top 10 holdings. This has given the ETF a boost over the past decade, returning 250% compared to 170% for S&P 500. When you invest in a growth ETF, you expect to receive market-beating results, and this ETF has been predicting that since it was created in January 2004.

A disadvantage of ETF is that Apple, Microsoftand Nvidia they combine to make up over 35% of it. That’s a lot of concentration for an ETF with 188 stocks. That said, if you’re looking for large, world-class companies that can still outperform many smaller companies with a market cap in the trillions, these three fit the bill.

LLY data by YCharts

This ETF has a solid base of companies leading the charge and is well-positioned to continue its momentum, given the industries in which the top companies operate. They touch virtually every aspect of technology while covering areas such as pharmaceuticals (Eli Lilly), retail (Costco Wholesale), and digital payments (Visa and MasterCard).

These companies don’t generally get as much attention as the Magnificent Seven, but they’ve all done well in recent years and have good growth opportunities ahead of them.

A growth ETF to avoid right now

Cathie Wood has become one of the most recognizable names on Wall Street, known to many for her big bets on high-growth stocks through her company, ARK Invest.

The company’s flagship fund, the ARK Innovation ETF (ARKK 0.59%)became one of the most popular in the stock market in the early parts of the COVID-19 pandemic. Unfortunately, the ETF has lost nearly three-quarters of its value since peaking in February 2021.

ARKK data by YCharts

This ETF focuses on companies that fit ARK Invest’s description of “disruptive innovation.” Its companies operate in industries such as electric vehicles, cryptocurrency and digital payments, cloud computing, biotechnology and a handful of others.

I’m a fan of many of the ETF companies’ missions. It undoubtedly contains some great companies that are helping to shape the future. I’ll give credit where it’s due. However, I’m not a fan of ETFs as a collective group, primarily because of the high cost and volatility (even by growth stock standards).

This ETF’s expense ratio is 0.75%, compared to the Vanguard Growth ETF’s minuscule 0.04%. It may be “only” a difference of 0.71%, but it matters a lot when you are investing for the long term. For perspective, imagine investing $500 in each ETF and an average annual return of 10% over 25 years. Here’s roughly how your fees would compare:

Table by author. Fees and investment value are rounded down to the nearest hundred.

It’s bad enough that the ARK Innovation ETF has underperformed the market over the past decade. However, paying a premium to own the underperforming ETF adds insult to injury. There are plenty of growth stocks on the market with better historical results (although the future is what matters) and much cheaper.

I like the Vanguard Growth ETF because it has proven to be more stable and puts investors in a position to save a lot of the gains they receive.