Growth investing is a strategy focused on increasing an investor's capital.
Popular fast-growing companies have led the investment pack recently, while value investing returns recently disappointed. During various times, each investment style outperforms. By choosing the best companies to invest in and profiting from the recent growth investing trend, there's an opportunity to beat the market returns. Value stocks are considered bargains and typically have lower valuations metrics like price-earnings and price-cash flow ratios. These stocks tend to offer higher dividend yields. Growth stocks, however, typically don't pay dividends, which enables these companies to reinvest earnings into growth initiatives. During some historical periods, value stocks have outperformed performed growth. But growth investing is beating value right now. For that reason, here are seven growth investment strategies.
All-in-one growth fund
"The easiest way to tilt your portfolio to growth is to buy a fund like Vanguard Growth ETF (ticker: VUG) which focuses on the large growth stocks in the market, as opposed to simply the overall market," says David Dietze, president of Point View Wealth Management in New York. VUG owns more than 300 stocks, with popular Microsoft Corp. (MSFT) and Apple (AAPL) topping the fund's investment holdings. The five-and 10-year annualized return is 11.98% and 15.68%, respectively. The companies within this fund enjoy an average 17.7% growth rate. With a 0.04% expense ratio, VUG is a bargain when compared to the 1.07% category average fee. Investors can buy VUG to boost growth stock exposure.
Small-cap growth funds
Small-cap stocks typically outperform large-cap companies. Drill down into the fastest growing small-cap growth sector and investors can attempt to super-charge returns. Be aware that since many of these firms are in early growth stages and riskier than larger firms. The safest way to play this sector is with a small-cap growth fund. Funds within this sector include actively managed and passively managed index funds. Here are several small-cap growth funds: T.Rowe Price Institutional Small-Cap Stock Fund (TRSSX), Vanguard Explorer Fund (VEXPX), iShares Russell 2000 Growth ETF (IWO) and SPDR S&P 600 Small Cap Growth ETF (SLYG). The first two are actively managed mutual funds, while the latter two are passively managed index funds.
For investors ready to cull the market for fast-growing companies, likely to continue, choosing individual growth stocks may be as simple as seeking out firms with faster revenue growth than the market, says Stephen Taddie, managing partner at Stellar Capital Management in Phoenix. This year, Autodesk (ADSK), Netflix (NFLX) and Etsy (ETSY) are leading the growth race. To temper growth stocks volatility, Taddie suggests investing in stocks that show growth at a reasonable price, commonly known as GARP, and incorporate price and valuation into the growth equation. Alphabet (GOOGL, GOOG) falls into the GARP category with 17% projected sales growth and a forward P/E ratio of 24.65, Taddie says.
Growth plus income stocks
For investors seeking growth investing with a dash of income, Nancy Perez, senior portfolio manager at Boston Private Wealth in Miami, recommends quality dividend-paying stocks. "Dividend growth helps to identify well-managed companies that have confidence in their future earnings and are more likely to consistently raise their dividend, thereby complementing price appreciation," Perez says. Investors can implement this strategy with a dividend aristocrats fund or screening for stocks with growing dividends. S&P 500 Dividend Aristocrats ETF (NOBL) invests in S&P 500 companies that have grown dividends for at least 25 consecutive years. The fund's year-to-date return is 16.83% and its current yield is 2.01%. NOBL has outperformed the S&P 500 with lower volatility since inception.
Growth sector funds
It's no secret that there are certain industries that are fast growers. Dietze recommends technology and health care sector funds to tilt an investment portfolio toward growth. The assumption is that growing sector funds will outperform value investing funds. When exploring the technology sectors, investors will find many funds from which to choose -- from targeted funds like SPDR S&P Software & Services ETF (XSW) to broad tech funds such as Invesco S&P 500 Equal Weight Tech ETF (RYT). For targeted health care exposure, the Fidelity Select Medical Tech & Devices Port (FSMEX) is narrowly focused, while Vanguard's Health Care Index Fund (VHCIX) sports a 0.1% expense ratio and covers the entire sector.
Large-cap growth sector index funds
A systematic way to target growth is using the Russell indices to direct investors toward the fastest-growing corners of the market, says Randy Watts, chief investment strategist at William O'Neil and Co. in New York. Russell indices can be used as a proxy to compare different equity styles, he says. For example, the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index by 3% since 2009. The Vanguard Russell 1000 Growth ETF (VONG) captures the returns of the Russell 1000 Growth Index for a reasonable 0.12% expense ratio. The index is designed to measure the performance of U.S. large-cap growth stocks. VONG's 13.27% five-year return also beat VUG's 11.99% return.
Investors don't expect to find bond investing mentioned on a growth investing list. But bond investments are highly sensitive to changes in interest rates. When interest rates decline, existing bond values increase and vice versa. The reason is with lower interest rates, higher-yielding bonds and bond funds will be coveted. This increases demand for these higher-yielding investments, and with limited supply, will drive bond prices up. With chatter about possible decreasing interest rates, mid- and long-term bonds as well as bond funds will be expected to appreciate. To play this potential growth strategy, consider investing in a diversified bond fund of medium duration such as the Dodge & Cox Income Fund (DODIX).
Add more growth to your portfolio with these types of investments:
-- All-in-one growth funds
-- Small-cap growth funds
-- Growth stocks
-- Growth plus income stocks
-- Growth sector funds
-- Large-cap growth sector index funds
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