If you're investing in the long term, growth stocks can help you maximize your gains. They can offer superior gains to dividend stocks, which often prioritize making recurring payments rather than growing their operations. The downside with growth stocks is that they can experience a lot of volatility from one year to the next. But if you're investing for not only years but decades, it can make a lot of sense to focus on growth stocks since over the long haul, they are likely to outperform dividend stocks.
Rather than picking individual growth stocks, you may want to put money into an exchange-traded fund (ETF) which gives you broad exposure to many of them through just a single investment. Two popular options include the Invesco QQQ Trust (QQQ -0.10%) which tracks the Nasdaq 100 index, and the Vanguard S&P 500 Growth Index Fund ETF (VOOG -0.19%) which focuses on growth companies within the S&P 500. Which one is the better option for your portfolio today?
Over the past decade, the Invesco fund has delivered superior returns
Both of these funds have made for good, marketing-beating investments over the past 10 years. But by focusing on the Nasdaq 100, which includes the top nonfinancial stocks on the exchange, the Invesco fund has been the far better investment during that stretch.
QQQ Total Return Level data by YCharts
There are many similarities between the two funds as Apple, Nvidia, and Microsoft make up the top three positions in both ETFs. However, in the Invesco fund they account for about 26% of the total holdings versus 35% in the Vanguard fund. And while the Invesco fund focuses on the Nasdaq 100, the Vanguard S&P 500 Growth ETF has more than 230 stocks in total, making it a much more diverse option.
A potential slowdown in the markets could hurt both ETFs
The stock market has been red hot over the past couple of years and the risk is that future returns may be limited. That can make both of these funds vulnerable to declines in the near term.
The Vanguard fund, due to its broader mix of stocks, may be less susceptible to a decline. But with more exposure to heavyweights such as Apple, Nvidia, and Microsoft, should those stocks struggle the most due to their high valuations, then it may be the Invesco fund, which has less exposure to them, that may be less vulnerable.
But when looking at the long run, both of these funds can make for promising long-term investments regardless of short-term trends in the market. There is a lot of overlap between them. It may ultimately come down to how diverse of an investment you are seeking and the exposure you want to tech. Within the Vanguard fund, just under 50% of the holdings are in tech stocks, versus around 60% in the Invesco ETF.
Tech stocks can sometimes generate far superior returns but they can also be susceptible to big selloffs, especially when their valuations soar to unsustainable levels.
For the long run, it's hard to go wrong with the Invesco ETF
The Invesco fund isn't as diverse as the Vanguard fund, which can be a disadvantage in the short run. But over the long haul, it's likely to outperform because by focusing on a narrower range of growth stocks, that can set it up for greater returns. Too much diversification can limit the returns an ETF can achieve.
While you don't necessarily want exposure to just a handful of stocks, which can increase your overall risk, I think the Invesco fund strike a good balance as its largest holding (Apple) only accounts for 9% of its entire portfolio.
As long as you're okay with short-term volatility, the Invesco fund looks like it may remain the better investment option for the long haul.
