Investing in exchange-traded funds (ETFs) is a sound strategy for long-term investors. The drawback of investing in ETFs, however, is that you can sacrifice gains for the sake of diversification and reducing your overall risk. But with growth-oriented funds, you can still achieve some impressive, market-beating returns.
Two funds that have outperformed the S&P 500 and more than doubled in value in the past five years are the Invesco QQQ Trust(NASDAQ: QQQ) and the Vanguard Growth ETF (NYSEMKT: VUG). Here's a look at why these funds have done so well, and whether you should consider adding them to your portfolio.
1. Invesco QQQ Trust
The Invesco QQQ Trust is a popular fund as it gives investors exposure to some of the best growth stocks on the market, specifically the 100 largest non-financial companies (by market cap) on the Nasdaq exchange. And with an expense ratio of just 0.2%, investors won't have to worry about fees taking an oversized chunk out of their returns.
Tech stocks account for 57% of the ETF's portfolio with consumer discretionary being the only other sector with a double-digit allotment at 19%. The Invesco QQQ doesn't offer as much diversification as other ETFs, but investors are still getting exposure to some of the best growth stocks on the planet, including Amazon, Nvidia, and Alphabet. Outside of tech, some of the ETF's bigger names include Costco, T-Mobile, and Amgen.
In the last five years, the ETF has generated a total return, which include dividends, of 166%. The S&P 500, by comparison, was up 102%. To put that into a monetary perspective, a $10,000 investment in the QQQ grew to $26,600 versus $20,200 with the S&P 500.
There will be some tough years when tech stocks struggle, but for those investing for the long haul, the Invesco QQQ Trust is a great ETF to add to your portfolio.
2. Vanguard Growth ETF
Another growth-oriented option is the Vanguard Growth ETF. In this case, investors are getting a piece of approximately 220 stocks. It focuses on the largest growth stocks as well, but unlike the Invesco QQQ, it includes financial companies.
Here, too, investors will have heavy exposure to tech with the sector accounting for just over 53% of the Vanguard Growth ETF portfolio. Consumer discretionary stocks take up a slightly larger chunk at 21%, but once again, those two sectors are the only ones where the weight is more than 10%.
One thing to note is that while the Vanguard Growth ETF is larger by number of holdings, its portfolio is more concentrated in the fund's top stocks than the Invesco QQQ. Here's how the funds compare with respect to their top three holdings:
| Stock | Invesco QQQ Trust | Vanguard Growth ETF |
|---|---|---|
| Apple | 8.9% | 13.0% |
| Microsoft | 8.9% | 12.8% |
| Amazon | 4.9% | 6.5% |
The top three stocks in the Vanguard Growth ETF make up 32.3% of its holdings, versus 22.7% with the Invesco QQQ Trust. The fund also has a lower expense ratio at 0.04%. The Vanguard Growth ETF's five-year total return is 134%, turning a $10,000 investment into approximately $23,400 today.
Both of these funds give investors great exposure to top growth stocks and can be excellent options for long-term investors. Ultimately, choosing between the two funds may come down to the expense ratio or how much exposure you want to the funds' biggest holdings.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Costco Wholesale, Nvidia, and Vanguard Index Funds - Vanguard Growth ETF. The Motley Fool recommends Amgen, Nasdaq, and T-Mobile US. The Motley Fool has a disclosure policy.
