Best Growth ETFs to increase Income and Wealth
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Best Growth ETFs to increase Income and Wealth

The discussion of bonds and their role in a diversified recession-resistant portfolio has been covered in depth, emphasizing the significance of bond ETFs. We’ve explored the crucial nature of diversification in portfolios, recognizing it as a key to successful long-term financial planning and retirement income optimization.

A key strategy involves diversifying with a mix of individual companies, bonds, cash, and ETFs. This approach can significantly enhance long-term income. For example, dividend ETFs like SCHD, VYM, VIG, and DGRO offer an excellent collection of low-cost, high-quality companies with strong track records of rising annual income in various economic conditions.

However, the combination of growth (like QQQ, the Nasdaq ETF) and dividends can significantly enhance long-term returns. Historical data since December 2006 reveals this blend results in superior returns with comparable volatility, and a 36% improvement in negative-volatility-adjusted total returns.

A deeper look into the numbers shows a compelling story:

  • Vanguard High-Yield ETF showed an income per $1,000 investment increase from $22 in 2006 to $96 in 2021, with an annual income growth of 10% and yield on cost increasing from 2.3% to 9.7%.
  • The Nasdaq ETF’s income per $1,000 investment grew from $2 in 2006 to $44 in 2021, with a remarkable annual income growth of 20% and yield on cost increasing from 0.25% to 4.4%.
  • Combining VYM and QQQ resulted in income growth from $14 to $98 for the same $1,000 investment from 2006 to 2021, an annual income growth of 14%, and an increase in yield on cost from 1.5% to 9.8%.

Looking ahead, various investment strategies present diverse potential outcomes:

  • The 10-Year US Treasury offers a yield of 4.1% with a long-term inflation and risk-adjusted expected return of 1.1%.
  • High-yield investments might offer a yield of 3.5% with a long-term inflation and risk-adjusted expected return of 8.3%.
  • The combination of high-yield and growth is projected to deliver a yield of 2.5%, with a high long-term inflation and risk-adjusted expected return of 12%.

Future income growth forecasts are also promising:

  • Analysts expect about 22% income growth from the combination of VYM and QQQ, with a real expected income growth of 10.5% after adjusting for risks, taxes, and inflation.
  • This growth rate significantly outperforms the expected inflation-adjusted dividend growth of the S&P 500.

In terms of capital gains, the inflation-adjusted consensus total return forecast for a $1,000 investment in VYM and QQQ shows a significant advantage over the S&P 500 and other strategies. The expected compound annual growth rate (CAGR) and the difference in returns over periods of 5 to 30 years demonstrate the long-term benefits of combining yield and growth.

Overall, these figures illustrate the potential of a balanced approach combining growth and dividend ETFs to maximize long-term income and wealth, offering a compelling strategy for investors looking to optimize their portfolios.

Top Growth ETFs to Consider

StrategyETFTickerExpense Ratio
NasdaqInvesco Nasdaq ETFQQQ0.20%
NasdaqInvesco Nasdaq ETFQQQM0.15%
Russell 1000 GrowthiShares Russell 1000 Growth ETFIWF0.19%
Vanguard Growth ETFVanguard Growth ETFVUG0.04%
S&P 500 GrowthSPDR Portfolio S&P 500 Growth ETFSPYG0.04%
Small-Cap GrowthVanguard Small-Cap Growth ETFVBK0.07%

In exploring growth ETF options, several stand out for their strong Morningstar ratings and low expense ratios. These include:

  1. Invesco Nasdaq ETF (QQQ): A well-known option with a solid track record.
  2. iShares Russell 1000 Growth ETF (IWF): Offers a diversified portfolio representing the large-growth market.
  3. Vanguard Growth ETF (VUG): Known for its low-cost access to a high-growth portfolio.
  4. SPDR Portfolio S&P 500 Growth ETF (SPYG): A cost-effective choice representing the faster-growing half of the S&P 500.
  5. Vanguard Small-Cap Growth ETF (VBK): Ideal for exposure to the potential growth giants of tomorrow.

These ETFs, while differing in specifics, share a common theme of offering growth potential through market-cap-weighted strategies, covering various sectors, and maintaining strong financial health ratings.

A Closer Look at These ETFs

Invesco QQQ Trust (QQQ): The Original Growth ETF

  • Overview: QQQ is renowned for its exceptional performance over the past 15 years, primarily tracking the Nasdaq-100 Index. It’s favored for its liquidity, especially by institutional investors.
  • Expense Ratios: QQQ has an expense ratio of 0.20%, while its counterpart QQQM, designed as a lower-cost version, has a 0.15% ratio.
  • Index Construction Critique: Morningstar notes that QQQ’s focus on Nasdaq-only stocks limits its diversification. The index includes the 100 largest non-financial firms on the Nasdaq, excluding companies listed on other exchanges regardless of their performance. This can lead to sector concentration.
  • Portfolio Analysis: With a forward PE slightly above its long-term average of 19 and a 28% free cash flow yield, QQQ’s portfolio includes 95% of wide and narrow moat companies and has an A- financial health rating. Notably, 65% of the Nasdaq 100 is tech-heavy, increasing to 71% with the inclusion of giants like Amazon and Tesla.

iShares Russell 1000 Growth ETF (IWF): Diversified Growth Portfolio

  • Overview: IWF is a low-cost fund that captures the faster-growing half of the Russell 1000 Index, emphasizing profitable industry leaders. It has a Morningstar Analyst Rating of Silver.
  • Investment Strategy: The fund uses market-cap weighting, increasing the weight of stocks as their valuations rise. This strategy helps manage turnover and transaction costs.
  • Portfolio Composition: IWF’s portfolio is slightly more expensive in terms of PE and P/cash flow but is expected to grow marginally faster over time. It has a high concentration of 51% in tech but maintains exposure to all sectors, including energy and utilities.

Vanguard Growth ETF (VUG): Efficient Access to a High-Growth Portfolio

  • Overview: VUG, known for its low fees, targets the faster-growing half of the U.S. large-cap market, tracking the CRSP U.S. Large Cap Index. It has Morningstar ratings ranging from Silver to Gold across different share classes.
  • Index Strategy: The fund’s market-cap-weighted strategy is aligned with the market’s view on the value of holdings, effectively curbing turnover. The index includes companies with high growth metrics like earnings per share growth and return on assets.
  • Portfolio Characteristics: VUG’s portfolio has a higher PE and price/cash flow compared to QQQ and IWF but includes a solid 96% of wide and narrow moat companies. The fund’s tech and communications exposure is substantial, with significant positions in top firms like Apple.

SPDR Portfolio S&P 500 Growth ETF (SPYG): A Competitive Alternative to Nasdaq

  • Overview: SPYG is one of the most cost-effective options in the market, fully replicating the S&P 500 Growth Index. It is rated Silver by Morningstar.
  • Investment Focus: The ETF includes the faster-growing half of the S&P 500, employing a market-cap weighting approach. This strategy balances the portfolio by adjusting weights based on valuation changes.
  • Fundamentals: SPYG’s portfolio offers a reasonable mix of valuation metrics, with a notable concentration in Apple. It provides a blend of tech and banking exposure, featuring high-profile names.

Vanguard Small-Cap Growth ETF (VBK): Focusing on Tomorrow’s Growth Leaders

  • Overview: VBK, with its Gold and Silver Morningstar ratings, is an appealing option for small-cap growth. It tracks the CRSP U.S. Small Cap Growth Index.
  • Investment Philosophy: The ETF focuses on the faster-growing half of the small-cap market, using market-cap weighting to manage riskier holdings.
  • Diversification and Growth Potential: VBK’s portfolio, while similar in valuation to large-cap growth ETFs, offers the fastest growth potential. However, it has the least exposure to wide-moat companies and the weakest financial health among the discussed ETFs.

In summary, each of these growth ETFs offers a unique approach to capturing market growth, with varying focuses on sectors, market caps, and growth strategies. While QQQ excels in tech-heavy, large-cap exposure, IWF and VUG provide a more diversified approach in the large-cap space. SPYG offers an alternative within the S&P 500 growth segment, and VBK stands out for those looking to invest in the potential high-growth small-cap sector.

Historical Performance

Invesco QQQ Trust (QQQ)

  • Historical Performance: Since its inception in April 1999, QQQ experienced a rapid initial growth, doubling in its first year. However, it faced a significant setback during the tech bubble crash, dropping by 81%.
  • Recovery Post-Crash: It took until 2015 for QQQ to recover for those who bought at the peak before the crash.
  • Dividend Growth: QQQ began paying a consistent dividend in 2004, showing considerable growth in dividend income from $3 per $1,000 investment in 2005 to $37 in 2021.
  • Analyst Expectations: Morningstar analysts predict significant real-expected income growth for QQQ in the future, subject to avoiding extended market downturns.

iShares Russell 1000 Growth ETF (IWF)

  • Performance Since June 2000: IWF was similarly impacted by the tech crash but recovered a year earlier than QQQ, in 2013.
  • Comparative Rolling Returns: The 15-year rolling return for IWF is lower compared to QQQ and slightly higher than the S&P 500.
  • Dividend Variability: IWF’s dividends have been more variable, with periods of stagnation or decline, leading to a long-term income growth rate that is less impressive than QQQ’s.

Vanguard Growth ETF (VUG)

  • Performance Since February 2004: VUG has consistently outperformed the S&P 500 but not QQQ. Its average annual return since inception is 13%.
  • Dividend Trends: VUG’s dividend income has seen a decline since 2018, resulting in a lower long-term income growth compared to QQQ and the S&P 500.
  • Future Income Growth Projections: Analysts expect VUG to have better income growth in the future, although likely not as high as QQQ’s.

SPDR Portfolio S&P 500 Growth ETF (SPYG)

  • Performance Since November 2000: SPYG has generally underperformed both the S&P 500 and QQQ.
  • Recovery Post Tech Crash: SPYG recovered from the tech crash quicker than QQQ, similar to IWF.
  • Dividend Performance: There has been a decline in SPYG’s dividends in recent years, but it has still managed to grow its dividends faster than the S&P 500.
  • Income Growth Forecast: Morningstar analysts project better future income growth for SPYG, though not as high as QQQ’s projections.

Vanguard Small-Cap Growth ETF (VBK)

  • Performance Since February 2004: VBK has slightly underperformed the S&P 500 and significantly underperformed QQQ.
  • Rolling Return Analysis: VBK’s 15-year rolling return is lower than QQQ and slightly higher than the S&P 500.
  • Dividend Growth: VBK’s dividend growth has been modest, with income growth beating the S&P 500 but not reaching the levels of QQQ.

The Essence of a Balanced Portfolio

  • A Blend of Stability and Growth: Achieving a balanced investment portfolio involves integrating a mix of elements – safe yield, growth, and a stable foundation of cash and bonds. This blend is pivotal in creating a robust portfolio that not only withstands volatile market conditions but also thrives across different economic cycles.
  • Resilience in Diverse Economic Scenarios: A well-structured portfolio, incorporating the right growth ETFs, should be equipped to endure not only the typical market fluctuations but also rare, extreme scenarios, such as an hypothetical another Great Depression. This kind of resilience is crucial for long-term financial security.

Evaluating Growth ETFs

  • Diverse Low-Cost Options: Our exploration today has showcased various growth ETFs, each offering unique advantages. Low-cost options like QQQ, IWF, VUG, SPYG, and VBK provide investors with a range of choices to suit different investment goals and risk appetites.
  • The Standout Performer – QQQ: Despite certain limitations, such as its Nasdaq-only focus and sector concentration, QQQ emerges as a leader in growth ETFs. Its track record for long-term returns, income growth, and future growth potential is unparalleled among its peers.

Beyond QQQ: The Importance of Diversification

  • Seeking Varied Yields and Exposures: While QQQ is a strong contender, it’s not the sole option. Investors might seek slightly higher yields or exposure to non-Nasdaq companies, such as MA and LOW, not covered by QQQ. This calls for diversification beyond QQQ, incorporating ETFs that cover a broader market spectrum.
  • Strategic Asset Allocation: A key to achieving exceptional long-term investment results lies in combining growth potential with yield generation and prudent asset allocation. Such a strategy balances the pursuit of high returns with the management of associated risks.
  • Statistical Probability and Financial Goals: By integrating growth ETFs into a broader investment strategy, investors can significantly enhance their chances (up to 90% statistical probability) of meeting or surpassing their long-term financial objectives. This approach comes as close to a guarantee as one might find in the unpredictable realm of stock market investing.

Conclusion

In conclusion, the judicious selection and combination of growth ETFs can significantly augment an investor’s portfolio, offering both resilience and robust returns. While QQQ stands out for its exceptional performance, incorporating a variety of growth ETFs based on individual investment goals and market outlooks can lead to a diversified, high-yielding, and growth-oriented portfolio that is well-equipped to navigate the complexities of the financial markets.


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