History Says This Could Be the Smartest Growth ETF to Buy With $1,000 Right Now
Key Points
Growth stocks and ETFs have been some of the market's best performers over the past several years.
But the biggest gains have come from the large- and mega-cap stocks.
Looking ahead, mid-cap growth stocks present an interesting risk/reward opportunity.
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Growth investors face an interesting choice today.
On one hand, growth stocks have delivered big returns over the past several years and strong corporate earnings growth could keep that trend going. On the other hand, valuations are starting to get stretched, long-term interest rates are hitting multi-decade highs, and there's talk of potentially slowing down the pace of artificial intelligence (AI) development.
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Overall, I think the investment case for growth stocks is still a positive one. And one exchange-traded fund (ETF) I think deserves more attention here is the iShares Core S&P U.S. Growth ETF (NASDAQ: IUSG).
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A track record that's hard to ignore
This fund tracks the S&P 900 Growth Index. Unlike a lot of the big growth ETFs, this one starts with a universe of large- and mid-cap stocks, giving it a potentially different risk/reward profile. Among the factors it considers in the selection process are sales growth, earnings trends relative to price, and momentum. In addition to the mega-caps like Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT), the iShares Core S&P U.S. Growth ETF can hold smaller companies that could become tomorrow's leaders as well.
Over the past decade, this fund has generated an average annual return of 17.6%, which is comparable to the returns of some of its peers, such as the Vanguard Growth ETF (NYSEMKT: VUG). And it's well ahead of the 15.4% average annual return that the Vanguard S&P 500 ETF (NYSEMKT: VOO) has produced.
Its 0.04% expense ratio means shareholders keep almost every bit of that return for themselves.
IUSG's growth prospects over the next decade
Because this fund is market-cap-weighted, its top 10 holdings still look substantially similar to those of other growth ETFs. But I think the addition of mid-caps makes this fund more compelling.
The iShares Core S&P U.S. Growth ETF currently trades at a forward price/earnings (P/E) ratio of 21.5. That's a big discount compared to the 27.6 multiple for the Vanguard Growth ETF. That's due in large part to the fund's mid-cap exposure. The iShares S&P Mid-Cap 400 Growth ETF (NYSEMKT: IJK) trades at a forward P/E ratio of 19.4, even lower than that of the S&P 500.
With earnings growth beginning to accelerate among smaller companies, the iShares Core S&P U.S. Growth ETF offers a compelling combination of future growth potential and relative value that large-cap growth stocks alone don't offer.
That's why I like this fund over the near term and over the next decade. It owns today's dominant growth companies as well as next-generation names that currently provide real value.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, Vanguard Morningstar Growth ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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