1 Growth ETF I’d Buy Hand Over Fist and 1 I’d Be Wary Of

Growth stocks have been some of the most popular investments in the stock market lately. It’s understandable why when you see the returns many of them have generated.

Like any type of stock, growth stocks come with risk. They offer investors a chance to beat market returns, but many are even more volatile because their valuations are based on future potential. That’s why exchange-traded funds (ETFs) focused on growth stocks can be a great option.

Growth ETFs give you exposure to growth stocks, but typically have lower risk because investments are spread across many companies. For those interested in growth ETFs, I’ve included one I strongly recommend and one I’d approach with caution.

The growth ETF I buy overhand

One of my favorite growth ETFs is Vanguard Growth ETF (VUG 1.26%) because it offers the best of both worlds. On the one hand, it has proven to consistently outperform the broader market (based on S&P 500). On the other hand, it owns large-cap companies, so it’s not as prone to volatility as younger growth stocks, which can be more speculative.

VUG data by YCharts

A common misconception is that smaller companies are more likely to earn higher returns, but this ETF and many of its holdings have proven that’s not always the case. Companies like Apple and Microsoft have grown over 300% and 200% respectively in the last five years and Nvidia went on a legendary streak, up over 2,600% in that span.

The growth ETF I’m skeptical of investing in right now

The Ark Innovation ETF (ARKK 0.98%) is the flagship ETF from investment firm Cathie Wood’s Ark Invest. Its popularity has skyrocketed during the COVID-19 pandemic, riding the boom of many high-profile growth stocks.

From March 2020 to February 2021, the ETF’s price increased by more than 300%. Unfortunately, it is now down over 70% from its February 2021 peak and is trading around April 2020 prices. What a roller-coaster ride it has been.

ARKK data by YCharts

This ETF focuses on companies focused on “disruptive innovation,” which is par for the course for Wood, who is known for making big bets on finding The Next Big Thing. I appreciate the ETF’s mission and what it aims to accomplish, but I would be cautious as an investor looking for a growth ETF to add to their portfolio.

My bias against the Ark Innovation ETF compared to the Vanguard Growth ETF is based on the companies leading the ETF. Here are the top 10 holdings for each ETF:

Data sources: Vanguard and Ark Invest. Vanguard holdings as of August 31. Ark Invest holdings as of October 4.

By no means does my preference for the Vanguard Growth ETF mean that I don’t believe in the holdings of the Ark Innovation ETF and what they may eventually become; I just believe and trust the top holdings of the Vanguard Growth ETF.

For the most part, the Vanguard Growth ETF’s top 10 holdings — which make up nearly 59% of the ETF — are all market leaders with tried-and-true business models, solid funding and a track record of long-term growth . The Ark Innovation ETF’s top holdings have a lot of potential, but a lot needs to go before they reach the level of the Vanguard ETF’s top companies.

Don’t overlook the costs of each ETF

Companies aside, I’m not a fan of the Ark Innovation ETF’s high expense ratio. At 0.75%, it’s one of the more expensive ETFs you’ll find on the market. That’s noticeably more expensive than the Vanguard Growth ETF’s 0.04% expense ratio.

Although the difference is “only” 0.71%, it could easily add up to thousands spent in fees over time. For perspective, if you invested $500 monthly and averaged a 10% annual return for 20 years, you’d pay just over $1,500 in fees with the Vanguard Growth ETF. With the Ark Innovation ETF, you would have paid nearly $28,000 in fees.

It’s one thing to get big growth in an ETF, but an underrated part is making sure you can keep as much of your earnings as possible for yourself instead of paying them out in fees.