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Published: Apr 4, 2023, 11:54am
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The last 18 months have been challenging for ‘growth’ companies – businesses that are expected to outrun the stock market in terms of share price, revenues and profits.
A depressed global economic backdrop, compounded by soaring inflation, rising interest rates and the threat of recession, is precisely the wrong condition for growth stocks to flourish.
Although growth stocks took a hammering in 2022 – particularly in the US, where the S&P 500 stock index was down 18% on the year – hope has grown for a reasonably swift bounce in their fortunes.
Inflation, for example, although still high, is at least heading broadly downwards, notably in the US, parts of the eurozone and, barring a recent blip, the UK.
At the same time, despite recent hikes by the Bank of England and the US Federal Reserve, interest rates are thought to be at, or near, their peak. Recessionary fears, although not off the table, have started to recede.
Investors who believe the worst economic conditions are over and are keen to add growth stocks to their portfolio could consider growth-orientated exchange-traded funds (ETFs), which offer a relatively low-cost way of gaining exposure to a range of assets including shares, bonds and commodities.
We asked Rob Burgeman, senior investment manager at RBC Brewin Dolphin, to come up with a list of growth ETFs for investors to consider. His selections are listed below, along with fund details, his thinking behind each selection, along with an FAQs section looking at ETFs in detail.
Investing in the stock market is speculative, not suitable for everyone, and capital is at risk. It is possible for investors to lose some, or all, of their money.
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Our Pick Of The Best Growth ETFs
The terms ‘fund type’, ‘benchmark’ and ‘annual fund charges’ are explained in the FAQs below.
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Fidelity Global Quality Income ETF
Why We Picked It
This is a globally benchmarked fund with a slightly greater emphasis on income than outright growth. As with the iShares fund mentioned above, this ETF’s largest holdings include the likes of Apple and Microsoft, but there is then quite a lot of divergence. Top 10 companies in this fund include Procter & Gamble, Nestle, Chevron, Visa and Merck.
Despite a lower technology exposure compared with the broader global index that it tracks, this fund still contains a well-diversified exposure to a range of quality companies from around the developed world.
Positions are selected according to a process aimed at reducing sector and country risk. Any income generated is distributed back to shareholders.
According to FE Funds Info, the fund’s 5-year cumulative return to 23 March 2023 was 70.3%.
Who should invest?
This fund might underperform a little in a full-on bull market where shares are on a sustained upward roll, but it looks well positioned for a world where interest and inflation rates are higher than they’ve been for the last 15 years or so.
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Invesco Nasdaq 100 ETF
Fund size
Fund type
Benchmark
NASDAQ-100 Notional Net Total Return Index
Why We Picked It
As its name suggests, this fund tracks the US Nasdaq 100 stock indexwhich is, by some reckoning, the premier global growth index. The fund invests at least 90% of its total assets in securities that comprise the index.
The Nasdaq has become the stock exchange of choice for companies in the information technology and biotechnology sectors, catapulting the exchange’s reputation as a powerhouse of growth companies.
The Nasdaq’s legacy and the ability for companies to raise funds has led to the index being dominated by technology companies: internet (21%), software (18%), semiconductors (16%) and computers (13%) – about two-thirds of the total exposure.
Technology and growth are both out of favour at the moment. Although I don’t see a return to the levels of outperformance that we saw in the run-up to the beginning of last year, this is still an excellent fund for capturing the higher growth sector in the US and beyond.
According to FE Funds Info, the fund’s 5-year cumulative return to 23 March 2023 was 129%.
Who should invest?
For a longer-term investor, this choice complements some of the other funds listed here and is by far the most growth-orientated fund. Investors need to buckle up for what can at times be a bumpy ride, but the longer-term potential is very good.
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Legal & General Multi-Strategy Enhanced Commodity UCITS ETF
Benchmark
Barclays Backwardation Tilt Multi-Strategy Capped Total Return Index
Why We Picked It
The fund looks to take advantage of volatility in commodity markets, through active positions in a broad range of commodities.
Commodities are a distinct asset class with returns that are independent of stock and bonds. This fund covers the breadth of the market, including energy (oil, gas and so on), precious metals (gold, silver), industrial metals (copper, nickel, etc.) and soft commodities comprising livestock and agriculture (soybeans, wheat, etc).
Because the performance of commodities is not necessarily correlated with other asset classes, the fund can act as an inflation hedge.
It also takes advantage of growth headwinds by taking active positions, for instance, being underweight on commodities whose price is set to be lower in the future compared with today and being overweight on commodities where the future price is likely to be higher.
An example of this is where the fund deploys a seasonal strategy applied to commodities such as heating oil and natural gas which have historically exhibited strong seasonality.
The fund was launched in 2022. According to FE Funds Info, the fund’s 1-year cumulative return to 23 March 2023 was -3%.
Who should invest?
This fund offers ideal diversification opportunities within an overall growth portfolio. The tailwinds for the sector – global population growth increasing demand for all types of commodities – are also positive.
But as we have seen over the last few years, global shocks can quickly become supply shocks, boosting commodity prices. It means a fund such as this also has defensive characteristics which may appeal to certain investors.
Methodology
When it comes to choosing from the numerous ETFs that are available, RBC Brewin Dolphin’s Rob Burgeman says that several factors should be taken into consideration: “First comes the question of which index are you looking to match? In my selections above, for example, the iShares ETF chooses the MSCI World Index as its benchmark. In contrast, Vanguard, a rival provider with a similar fund, opts for the FTSE All World equivalent.
“Does this make any difference? Yes. Over 10 years, the Vanguard FTSE All World ETF has produced a total return of 169%, while the iShares ETF has delivered 188%.”
Mr Burgeman adds that the investment tracking process involving full replication (see FAQs below) is the most secure strategy, but is also the costliest: “In contrast, a comparatively cheap approach that uses derivatives – sophisticated investment vehicles based on the buying and selling prices of securities at certain dates in the future – can leave investors exposed in the event that there is a financial meltdown and a counterparty goes bust.”
Other factors to consider include the pedigree of the provider: “Investment houses will often issue ETFs with the latest fad. But, after a year or so, if it hasn’t reached critical mass, they will simply close the fund, often with little warning. To combat this, we try to make sure that we spread around our exposure to ETFs, rather than having them all issued by one house.
“Bear in mind that the cheapest funds aren’t necessarily best. Also, in the ETF space, remember that while specialist products such as ‘thematic’ or ‘smart’ funds have a role to play in portfolio construction, as a rule of thumb, the more esoteric the product, the higher the costs.”
“For us, it is about blending these various factors to make the right overall choice.”
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Frequently Asked Questions (FAQs)
Why invest in the stock market?
There are plenty of reasons for investing in stocks and shares – from taking the fight to inflation and making your money work as hard as possible, to building a retirement nest egg.
Every form of investing carries a risk and the stock market isn’t for everyone. But if you’ve weighed up the pros and cons and have time on your side (at least five years), then the next consideration is deciding exactly how you’re going to gain exposure to stocks and shares.
It’s possible, for example, to invest all your money in a single company. But this is a high-risk strategy. If the company fails (and they do), it’s possible to lose a large proportion – if not al – of your cash.
What is an investment fund?
In contrast to having exposure to just one or a handful of companies, investment funds enable investors to diversify their money via a large portfolio of holdings which is invested on your behalf.
Contributions are pooled from potentially hundreds of thousands of investors, with the proceeds managed by professionals according to strict investment mandates and each with a particular target. Such as outperforming a benchmark stock index by a certain amount each year, for example.
Funds hold a range of assets – from cash and bonds to equities and property – each with varying risk profiles. Note that equities is an interchangeable term for stocks and shares.
What is an exchange-traded fund?
ETFs enable investors to access stock and commodities markets without requiring the share-picking skills associated with selecting individual company stocks.
This is because ETFs focus less on individual businesses, and more on a collection of the main investments within a particular market or industrial sector, or other assets such as commodities.
What is an exchange-traded commodity?
ETCs are similar to ETFs but, rather than track stock market indices, they follow the performance of commodities such as gold and other precious or industrial metals, energy sources such as natural gas, and agricultural products such as wheat.
How do ETFs work?
ETFs combine the characteristics of shares with those of index tracker funds.
Shares provide a slice of ownership of a particular company. An index tracker fund is a collective investment that uses computer algorithms to help it invest in all the companies within a particular stock market index or industrial sector with the aim of reproducing its performance.
For example, this might be the FTSE 100 of the UK’s largest companies, or businesses involved in a sector such as mining or technology.
With ETFs, an investment firm buys a basket of assets (shares, bonds, etc) to create the fund. It then sells shares that track the value of the fund, which is determined by the performance of the underlying assets. These shares can then be traded on markets in the same way as conventional stocks.
Buying shares in an ETF doesn’t mean you own a portion of the underlying assets in the way you would when buying shares directly in a company. The firm that runs the ETF owns the assets and adjusts the number of associated ETF shares to keep the price synchronised with the value of the underlying assets or index.
So-called ‘physical’ ETFs hold the assets linked to the index in question and, as with index trackers, either replicate the index in full – by buying an appropriately weighted amount in each stock depending on its size within an index – or rely on a technique called ‘sampling’.
‘Synthetic’ or ‘swap-based’ ETFs use financial instruments called derivatives to follow an index.
As with other types of shares, it is possible to apply ‘stop’, ‘limit’ and ‘open’ orders when buying ETFs. These are brokerage instructions that apply when certain prices are reached and are designed to head off any surprises for would-be investors.
What’s the appeal of ETFs?
ETFs are ‘passive’ funds in that they replicate an existing stock index, say, without the need for ‘active’ asset selection, making them cheaper to own because they cost less to run. The less that investors pay in management fees, the more their money has the power to boost returns.
As well as competitive charges, ETFs also offer investors diversification. This helps defend from stock market shocks by spreading money around different sectors.
According to the London Stock Exchange, there are nearly 2,000 ETFs listed on its main market offered by around 50 issuers. Statista says there are nearly 9,000 ETFs in circulation worldwide.
How to invest in ETFs?
The most convenient way to gain exposure to a range of ETFs is via an online investment platform. They can also be bought directly from a fund provider, via a financial advisor who specialises in investing, or through a robo-advisor.
Before signing up to a particular provider, it’s useful for investors to have some idea about the sort of investments they want to buy. For example, is the aim to follow global companies that make up a world stock market index? Or is preference for a particular country’s stocks, such as those traded in the UK or US?
Either way, it’s best to choose a platform with the widest spread of appropriate fund choices available, ideally, at the most competitive price (see below).
What do ETFs cost?
Investors buying ETFs via an investment platform will be faced with a brace of fees: an annual fund charge from the fund provider – levied as a percentage on the amount being invested, plus platform provider charges which come in a variety of guises. These might be billed on a ‘per transaction’ basis or linked to the size of an investment portfolio.
Annual fund charges for our selected funds appear above. For example, a £1,000 investment in a fund that charges 0.5% annually would cost £5.
Generally speaking, investors will also have to pay a trading fee when buying or selling ETFs. This typically works out to between £5 and £10, in addition to any annual platform fee charged by the provider concerned.
When buying company shares listed on, say, the London Stock Exchange, investors incur a stamp duty charge of 0.5% of the transaction. However, despite being traded on exchanges, EYFs are exempt from stamp duty in most jurisdictions, including the UK.
Find out more about fund charges and other key features in our wider look at online trading platforms.
As with individual stocks and shares and other types of fund, it’s possible to hold ETFs within a tax-protected product such as an individual savings account, or ISA. Doing this shields you from payingincome tax on dividends or capital gains tax on any profits.
Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.
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Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.
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