What Is a Growth ETF?

There are many types of equity ETFs to choose from, but the general category of ETF that has historically shown potential to outperform the market averages is growth. However, along with this growth potential, there is above-average short-term market risk to consider. 

Learn more about growth ETFs to see if they are a smart fit for your investment portfolio. 

What Is a Growth ETF?  

A growth ETF is an exchange-traded fund that invests in stocks of companies with the potential for above-average growth. Like most other ETFs, a typical growth ETF will passively track a benchmark, such as the S&P 500 Growth Index or Russell 1000 Growth Index, containing growth stocks that may be characterized by rapidly growing earnings, strong sales and high valuations. 

Growth ETFs can produce above-average returns in the long term, but they also tend to carry more short-term market risk compared with value-oriented stocks that tend to produce more stable returns. For this reason, growth ETFs are generally best suited for investors who don’t mind seeing short-term swings in market price. 

The largest growth ETF on the market is the Vanguard Growth ETF (VUG), with $79.9 billion in assets. The largest ETF that focuses primarily on growth-oriented stocks, although not formally categorized as a growth ETF, is the Invesco QQQ Trust (QQQ), with $165.9 billion in assets. 

How to Choose the Best Growth ETFs 

Choosing the best growth ETFs for a portfolio depends primarily on the investor's goals, time horizon and risk tolerance. Generally, growth ETFs may be suitable for a long-term investor with relatively high tolerance for risk, meaning they don’t mind short-term price fluctuations in exchange for the possibility for above-market long-term returns.

Criteria for choosing the best ETFs for long-term investing include: 

• High assets under management: Growth ETFs with the highest AUM tend to have higher trading volume, which generally translates to higher liquidity and superior pricing through lower bid/offer spreads. Higher AUM also generally leads to lower expenses through economies of scale. 
• Low expense ratio: When evaluating growth ETFs that track the same index, the one with the lowest expense ratio will generally produce higher returns in the long term. 
• Long-term performance history: While past performance is no guarantee of future results, the longer the performance history, the greater the evidence that an ETF tracks its benchmark closely. Past performance may also serve as evidence that a fund outperforms most of its category peers. For long-term performance, investors should review 10-year returns or longer. 

10 Best Growth ETFs by AUM, Expenses and Long-Term Performance 

A great way to narrow down to a small list of the best ETFs to consider adding to a portfolio is to use the general criteria for selecting high quality ETFs. To arrive at our top five ETFs, we used our ETF screener and selected “growth” under the ETF channels. We started the sort with the highest assets under management. We then considered only ETFs with below-average expense ratios and a performance history of at least 10 years. 

Returns are annualized through Jan. 31, 2023. 

Pros and Cons of Growth ETFs 

Like other types of ETFs, growth ETFs have certain advantages and potential disadvantages that investors should consider before buying shares. For example, while growth ETFs have the potential to provide above-market returns in the long term, they can have wide swings in price in the short term. 

The Pros of Growth ETFs 

• Potential for higher returns: Based on historical performance, growth stocks can outperform the broader market over time. 
• Diversification: Rather than researching and analyzing individual growth stocks to build a portfolio, a growth ETF can invest in dozens or hundreds of growth stocks within one packaged security.

The Cons of Growth ETFs 

• Short-term volatility: The same nature of growth ETFs that enables above-average long-term returns also increases the risk of short-term swings up and down in price. This makes growth ETFs less suitable for investors with low risk tolerance. 
• Lack of control: Like with other ETFs, investors are not able to choose the stocks to be held in a growth ETF portfolio as they could if they invested in individual growth stocks. 

Bottom Line  

Growth ETFs can be a great way for investors to gain low-cost, diversified exposure to growth stocks. These growth funds can work well for investors who are willing to accept above-average short-term market risk in exchange for the potential to earn above-average long-term returns.