Best Growth ETFs in 1Q21
Most of you would be familiar with the ARK family of funds, run by the now renowned investor, Catherine Woods, whose team of analysts focused on identifying innovative stocks that are set to have a structural impact on their respective industries.
Never mind that most of the stocks in the ARK funds are loss-making. What matters is that these companies can continue to demonstrate a strong top-line growth profile, a testament of their new school business model that seems to trump old school teachings, the likes of Warren Buffett.
There is no doubt that in the battle of supremacy between value and growth investing, the latter has demonstrated its superiority as the preferred manner of investing over the past decade.
Has the tide finally turned in 2021 as we witnessed a sector rotation favoring value counters over their growth counterparts amid a rising yield environment? That will be an article for another day.
In this article, we will be focusing on identifying the 5 best growth ETFs that most would probably not be aware of.
Despite the current preference for value vs. growth, these growth ETFs have continued to outperform the overall S&P 500 index in 2021 as at end of the first quarter. It will be interesting to explore what these funds’ market-beating strategies are and if they can be sustained for the remainder of 2021.
We screened out these growth funds using the Stock Rover Screener, which allows us to quickly and easily identify some of the best-performing ETFs (growth, value, blend) in 2021. This is the key screening criteria:
- Growth or High Beta ETFs
- Asset Under Management (AUM) more than US$200m
- Expense Ratio less than 0.50%
- Outperform S&P 500 index in 2021 as at end 1Q
These ETFs are probably not under the radar of the man-in-the-street, considering they are not large, low-cost, index ETFs such as VT and VOO prevalently held by the masses. I am not familiar with any of these names before researching these growth ETFs for this article.
However, it is interesting to note that these market-beating growth ETFs expense ratios are not atrocious and some have also handily beat the S&P 500 index not just in 2021 but over the past 5-years as well.
Without further ado, let’s take a look at the top 5 best growth ETFs in 2021 and their key portfolio composition.
#1: Invesco S&P 500 High Beta ETF (SPHB)
- AUM: $945m
- Expense Ratio: 0.25%
- 1Q YTD 2021 performance: 25%
- 5 years performance: 174%
The SPHB ETF seeks to track the investment results (before fees and expenses) of the S&P 500 High Beta Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
Strictly following its guidelines and mandated procedures, S&P Dow Jones Indices LLC compiles, maintains, and calculates the index, which is designed to measure the performance of the 100 constituents of the S&P 500 Index that have the highest sensitivity to market returns, or beta, over the past 12 months as determined by the index provider.
The SPHB ETF has the highest weighting in Financial Services, followed by the Energy sector. On the other hand, the weighting for Consumer Defensive, Communication Services, and Utilities is almost non-existence.
Given its high beta nature or one which is relatively more “volatile”, the fund tends to outperform the market in a bull market while underperforming it in a market sell-off. This is pretty evident from its 5-year price performance vs. the S&P 500 index.
The table below shows the Top 10 holdings of the fund.
SPHB top ETF is NVDA. There is also substantial exposure to cruise counters, with 3 cruise stocks in the Top 10 holdings of the ETF. These cruise stocks have also witnessed higher portfolio exposure of late, with substantial additions made to these counters.
Overall, the counters in SPHB are generally equal-weighted, with no substantial exposure to any single counter.
With the expense ratio of the fund being a relatively affordable 0.25%/annum, this is one ETF that an investor can consider to have beta exposure.
Taking a look at the chart on TradersGPS, there was no exit signal in the past 6 months at all. Assuming you had entered this ETF in mid-November as per the chart above at the $50 range, you would be looking at an estimate 50% profit.
#2: Invesco S&P 500 GARP ETF (SPGP)
- AUM: $279m
- Expense Ratio: 0.34%
- 1Q YTD 2021 performance: 16%
- 5 years performance: 165%
The SGPG ETF seeks to track the investment results (before fees and expenses) of the S&P 500 GARP Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
Strictly following its guidelines and mandated procedures, the index provider compiles, maintains, and calculates the underlying index, which is designed to track the performance of approximately 75 growth stocks in the S&P 500 Index that exhibit quality characteristics and have attractive valuation.
This is a fund that combines both growth + valuation or simply Growth at Reasonable Valuation (GARP), a term popularized by famed investor Peter Lynch. Out of the 500 stocks in the S&P 500 index, the fund selects roughly 75 stocks that exhibit growth characteristics while yet at the same time, it is NOT your typical growth counters with ZERO earnings.
In terms of sector exposure, the ETF is similarly heavily exposed to the Financial Services sector where 2021 is expected to be a growth year (from a low 2020 base) for many financial institutions amid a rebound in economic activities and higher yield expectations.
Unlike SPHB, SPGP has got ZERO exposure to the Energy sector which is the second-highest sector exposure for the former. Instead, it has higher exposure to the Technology sector, which is being substantially underweighted for SPHB.
The fund’s Top 10 names include household names such as Netflix, Salesforce, and Amazon, many of them being large-cap growth stocks that are pretty reasonably valued. This fits the ETF thesis of investing in GARP companies.
Surprisingly, there are not many financial services names in its Top 10 holdings, with SVB Financial Group being the only key one.
While SPGP’s performance might not be as strong as SPHB in 2020, its 5-years’ price performance is pretty comparable at 165%, which far outperforms that of the S&P 500 index 5-years’ price performance of 117%.
With an expense ratio of just 0.34%, this is one growth ETF where investors who have a preference for large-cap growth stocks that are not trading at “insane” valuations might be interested.
Both SPGP and SPHB focus on large-cap names. For the next 3 best growth ETFs, who will be looking at ETFs whose focus is on identifying mid-small cap names that are typically more growth-orientated.
Similar to SPHB’s chart, SPGP has been trending up steadily over the past 6 months without any exit signals.
#3: iShares S&P Mid-Cap 400 Growth ETF (IJK)
- AUM: $7,954m
- Expense Ratio: 0.17%
- 1Q YTD 2021 performance: 11%
- 5 years performance: 108%
The IJK ETF seeks to track the investment results of the S&P MidCap 400 Growth IndexTM, which measures the performance of the mid-capitalization growth sector of the U.S. equity market.
The fund generally invests at least 90% of its assets in securities of the underlying index and depositary receipts representing securities of the underlying index.
It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
Unlike the former 2 growth ETFs which we highlighted earlier, the IJK is more like a passive ETF that invests in counters forming the S&P MidCap 400 Growth index. Naturally, for a passive ETF, you would expect the expense ratio to be relatively low at just 0.17%. IJK’s AUM of close to $8bn is one of the largest on this list.
The key difference in sector allocation between the IJK ETF vs the S&P 500 is the heavier weighting to industrials, with much lower exposure to Energy and Utilities. The relatively lower weighting in Financial Services and Energy, two strong-performing sectors in 1Q YTD 2021 is likely the key reason why the performance of IJK has not been as robust as the 2 earlier growth ETFs highlighted, although IJK still manages to outperform the S&P 500 marginally YTD.
Many names in the fund’s top 10 holdings might be unfamiliar to the man-in-the-street, considering that they are smaller cap in nature and likely less prominent as compared to their large-cap counterparts.
It is interesting to note that Enphase Energy is the fund’s top holding. Note that the Energy sector has a very low sector exposure of just 1.5% in the fund. Thus, Enphase Energy is likely the dominant energy stock exposure that the IJK ETF holds.
Many small-mid cap growth names have been sold off in the past few months, which is why IJK being a passive fund that tracks the S&P Midcap 400 Index, has been trimming many of its counters.
Overall, there is no single stock that has an outsize exposure in the portfolio, unlike SPGP that has a relatively high 4% of its portfolio exposed to Netflix.
For investors who believe in having some exposure to mid-cap names, this might be the ETF to consider, with its 5-years performance of 108% pretty comparable to the S&P500 performance of 117%.
Following the TradersGPS chart, if one had entered in late November last year, profits should have been locked in at early March before it dropped further. Recent buy signals have emerged once more as it appears to have broken out of the resistance around $80.
#4: SPDR S&P Kensho New Economies Composite (KOMP)
- AUM: $1,988m
- Expense Ratio: 0.20%
- 1Q YTD 2021 performance: 21%
- 3 years performance: 140%
The KOMP ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Kensho New Economies Composite Index.
Under normal market conditions, the fund generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index.
The index is designed to capture companies whose products and services are driving innovation and transforming the global economy through the use of existing and emerging technologies, and rapid developments in robotics, automation, artificial intelligence, connectedness, and processing power.
Based on the above fund’s description, KOMP in many ways is similar to ARK funds in that it seeks to identify innovative companies at the forefront of their industries.
The fund’s performance this year has been outstanding, appreciating by 21% 1Q YTD compared to ARK’s best performing fund ARKQ which appreciated by just 13%. The fund was incorporated back in late-2018, hence it does not have a long track record, but since inception, the KOMP has appreciated by 140% compared to the S&P 500 rise of 54% in the same period.
Not surprising, KOMP’s top sector is the technology sector where this sector alone comprises c.42% of its portfolio. Many of these “innovative” companies engaging the use of AI and robotics are likely also new-age technology companies. Its stock portfolio composition will give us better insights if these names are the big-cap tech names or the more niche mid-cap names.
Looking at the ETF Top 10 stock holdings, it is pretty evident that many of these names are your smaller cap tech names, except for NVDA.
The ETF top holding is this stock which is pretty much unheard of called Vuzix Corporation (VUZI). Vuzix is an American multinational technology firm headquartered in Rochester, New York.
Founded in 1997 by Paul Travers, Vuzix is a supplier of wearable display technology, virtual reality , and augmented reality. Vuzix manufactures and sells computer display devices and software.
The counter generated a 207% return in 1Q 2021, which is a key reason why KOMP’s YTD 2021 performance has been relatively robust.
Other interesting names in KOMP include NIO (EV Maker) and RIOT (bitcoin miner) which together with VUZI, make up the Top 3 holdings of KOMP, encompassing more than 10% of portfolio weighting.
Despite the recent weakness seen in mid-cap growth counters, KOMP’s performance has been resilient to say the least, with a drawdown of <10% from the last peak, when many growth stocks and ETFs such as ARK funds have declined by >20% from the last peak.
Investors who wish to have some exposure to some of these smaller-cap, more volatile, growth stocks might want to have the KOMP ETF on your watchlist.
KOMP appears to be trading sideways since February. Nonetheless, those who have taken a position in mid-November around $50 would also have exited positions around $68, locking in profits before a further plunge.
#5: SPDR S&P 600 Small Cap Growth ETF (SLYG)
- AUM: $2,308m
- Expense Ratio: 0.15%
- 1Q YTD 2021 performance: 15%
- 5 years performance: 123%
The SLYG ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P SmallCap 600 Growth Index.
The fund generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index.
The index measures the performance of the small-capitalization growth segment of the U.S. equity market.
It may purchase a subset of the securities in the index to hold a portfolio of securities with generally the same risk and return characteristics of the index.
Similar to IJK, the SLYG is a passive ETF that seeks to replicate the performance of the S&P 600 Small Cap Growth Index, hence one should not expect a high expense ratio (just 0.15%) for such a passively managed ETF.
With small-cap outperforming their large-cap counterparts in 1Q YTD 2021, this ETF has generated returns of 15% vs. the S&P 500’s 8%. On a 5-years horizon, the performance of SLYG also marginally edges out the S&P 500.
In terms of sector allocation, the SLYG ETF is more heavily geared towards technology and Industrials, similar to that of IJK. In many sense, SLYG IS similar to IJK, the key difference being their stock selection. Many names in the SLYG portfolio are stocks of a small-cap nature, many of which you probably would not have heard of (except for GameStop) as seen from the table below.
The fund’s top holding is Nektar Therapeutic with a 3.5% position size, double that of the second-largest holding in the fund. GameStop, a popular meme stock, holds a 1.8% portfolio position. As mentioned, SLYG is a passive ETF that seeks to mimic the performance of the S&P 600 small-cap index.
For its 1Q YTD performance of 15%, one would probably be better off being exposed to the less volatile IJK ETF which has lower returns but likely also lower volatility. Investors who are looking at small-cap growth exposure might however wish to have a small allocation in this ETF.
Similar to KOMP, SLYG has been trading sideways since February as well. As with the scenario of taking on positions in mid-November, one would have locked in profits in March.
Conclusion: Top 5 Best Growth ETFs To Buy
These are the Top 5 best growth ETFs that I have screened out using the Stock Rover Stock Screener. While all of them have outperformed the S&P 500 in 2021 as at the end of the first quarter, the selection criteria also takes into account the fact that many of these growth ETFs are also low-cost (based on expense ratio) with a good track record of strong outperformance over a medium-term horizon (5-years).
From an investment standpoint, my preferred growth ETF, if I am to select just 1, will be the KOMP ETF which I see as a good alternative to the ARK funds, one that is also much cheaper in terms of the expense ratio. I am familiar with quite a number of stock holdings in the KOMP portfolio but am hesitant in taking direct stakes in most of them (I do have direct exposure in NIO, NVDA, RIOT, etc). Investing in the KOMP ETF might be a diversified approach to having exposure in many of these innovative but volatile names.
If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.
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