What is Growth Investing? (Plain English Definition)
Definition: Growth investing is a strategy focused on buying stocks of companies expected to grow their earnings faster than the overall market.
Growth Investing Explained Simply
Growth investing is an investment style that targets companies with above-average earnings growth potential. Growth investors are willing to pay higher prices relative to current earnings because they believe the companies will grow rapidly in the future. Technology companies, biotech firms, and innovative disruptors are typical growth stocks.
Growth stocks tend to have high P/E ratios, high price-to-book ratios, and low or no dividends because these companies reinvest their profits back into the business to fuel expansion rather than paying out cash to shareholders. They also tend to be more volatile than value stocks, with larger price swings in both directions.
Growth ETFs select stocks based on metrics like historical and projected earnings growth rates, revenue growth, and return on equity. Popular growth ETFs include the Vanguard Growth ETF (VUG), iShares Russell 1000 Growth ETF (IWF), and Invesco QQQ Trust (QQQ). These funds tend to be heavily weighted toward technology and consumer discretionary sectors.
Growth Investing Example
The Vanguard Growth ETF (VUG) holds companies like Apple, Microsoft, Amazon, and Nvidia -- companies growing earnings at 15-30% annually. VUG might have a P/E ratio of 30 compared to the S&P 500's P/E of 22. In strong economic periods, VUG has outperformed significantly -- from 2010 to 2020, it returned about 17% annually versus 13.5% for the S&P 500. However, growth stocks can underperform sharply during rising interest rate periods.
Why Growth Investing Matters for ETF Investors
Growth investing through ETFs gives investors access to the fastest-growing companies in the economy without the risk of picking individual winners and losers. Many of the best-performing stocks in history have been growth companies, but many growth companies also fail. For ETF investors, understanding the growth versus value distinction helps you build a balanced portfolio. Some investors tilt toward growth for higher potential returns, while others prefer a blend. Growth ETFs tend to outperform during low-interest-rate environments and bull markets, but can underperform during recessions and rising-rate periods. Knowing this helps you maintain realistic expectations for your growth-oriented holdings.
Growth Investing vs Value Investing
| Growth Investing | Value Investing |
|---|---|
| Growth investing is a strategy focused on buying stocks of companies expected to grow their earnings faster than the overall market. | See full definition of Value Investing |
While growth investing and value investing are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Value Investing
Value investing is a strategy focused on buying stocks that appear underpriced relative to their fundamental worth, seeking a margin of safety.
Price-to-Earnings Ratio (P/E)
The price-to-earnings ratio compares a company's or fund's current share price to its earnings per share, indicating how much investors are willing to pay for each dollar of earnings.
Momentum Investing
Momentum investing is a strategy that buys securities that have been rising in price and sells those that have been falling, based on the tendency for trends to continue.
Large-Cap
Large-cap refers to companies with a market capitalization typically above $10 billion, representing the biggest and most established publicly traded companies.
Earnings Per Share (EPS)
Earnings per share is a company's net profit divided by its number of outstanding shares, showing how much profit each share represents.
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