Investing in fast-growing companies can help investors build significant wealth over the long term before they shift to more conservative strategies closer to retirement. However, growth stocks can be challenging. They often carry more risk than more mature companies. They also might have more complicated business models, and their competitive advantages may not be as straightforward to understand.
Remember, there is no free lunch. The potential for big growth almost always comes with more volatility and risk. That's why diversifying your investments is crucial. Not every growth stock will be a winner, but if you spread your money across different investments, the winners should compensate for the misses (and then some).
ETFs, or exchange-traded funds, are a great choice for investors because they represent an easy way to get diversification -- their portfolios hold arrays of individual stocks, traded under a single ticker symbol. Consider buying and holding these three high-quality growth ETFs. Even better, it doesn't take a lot to start your investments in these three ETFs.
If you have $2,000 available to invest and are in need of strong, diversified options to consider, these ETFs can form a great basis for your portfolio, especially if you hold them long-term.
1. Invesco QQQ Trust ETF
The Invesco QQQ Trust ETF (QQQ -0.56%) might be the best technology ETF you can buy. It tracks the Nasdaq-100 index, which has been highly successful due to its technology-heavy composition. Approximately 60% of the ETF's assets are tech stocks. The "Magnificent Seven" companies, which are leading hot growth trends including cloud computing and artificial intelligence (AI), account for more than 40% of the ETF's value.
There is some risk in that level of concentration. If those megacap tech stocks falter, the Invesco QQQ will surely follow. During market downturns, the Invesco QQQ has historically crashed harder than the S&P 500. Still, volatility is arguably the price of stellar long-term performance. The Invesco QQQ has handily outperformed the S&P 500 over the past decade.
Data by YCharts.
Many of the trends driving the technology sector's recent strength are still in their early innings, and the global economy has steadily become more reliant on technology over time. If you want dependable technology exposure in your portfolio, it's hard to go wrong with the Invesco QQQ Trust ETF.
2. Vanguard Growth Index Fund ETF
Vanguard is among the oldest and most trusted names in the ETF industry, and the Vanguard Growth Index Fund ETF (VUG -0.48%) is another tech-focused ETF worth considering. It tracks the CRSP US Large Cap Growth index, and holds 179 individual stocks today. Despite having more stocks in its portfolio, the ETF is, ironically, even more concentrated in Magnificent Seven stocks than the Invesco QQQ.
The Vanguard Growth ETF's top three holdings are all Magnificent Seven names: Apple (13.37%), Microsoft (11.07%), and Nvidia (11.04%). Considering they represent over a third of its value, it should probably be a prerequisite for buying this ETF that you feel optimistic about these companies. That said, the ETF has also outperformed the S&P 500 over the past decade. Another thing to like is its low expense ratio. The Vanguard Growth ETF's expense ratio is just 0.04%, or $0.04 for every $100 you have in the fund. The Invesco QQQ's expense ratio is much higher at 0.2%.
Data by YCharts.
This isn't a comparison between the two, and it's always good to diversify among the ETFs you own. If you decide to put money into both, remember how much they lean on the Magnificent Seven stocks, and make moves elsewhere in your portfolio to ensure you don't inadvertently get more concentrated than you intend to be. It's easy to let that happen if you're not careful: Even the S&P 500 index has over 33% exposure to the Magnificent Seven today.
3. Vanguard Small-Cap Growth Index ETF
The Vanguard Small-Cap Growth Index ETF (VBK -0.34%) can be a fine complement to your other growth investments. It tracks the CRSP US Small Cap Growth index, and holds shares of 585 companies with a median market cap of just $8.5 billion.
The ETF is significantly less technology-heavy than the VUG or QQQ, but tech is still its largest weighting -- 22.7% of its value comes from the sector. Its other top sectors are healthcare (16.3%), consumer discretionary (16.1%), and industrials (20.3%). Additionally, no individual stock accounts for more than 1.15% of the fund's value. You've also got to like its modest 0.07% expense ratio.
VBK Total Return Level data by YCharts.
Large and mega-cap stocks have done quite well in recent years, so this small-cap ETF has underperformed the broader market since the start of the pandemic. Don't let that discourage you from owning it, though. Different investing strategies work better at different times, and small-cap stocks may shine again in the future. Until then, the Vanguard Small-Cap Growth ETF is worth owning for diversification as seemingly everything else in the market gets pulled toward big technology stocks.
