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Don't Let Underperformance in Growth ETFs Fool You

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Wall Street has been in decent shape this year on vaccine and fiscal stimulus optimism. However, gains have varied at every segment as the rally has been supported by cheap value stocks that bet big on faster-than-expected economic normalcy.

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is up 10.2% this year versus 5.8% advancement in the S&P 500 and 2% gains in the S&P 500 growth counterpart (SPYG - Free Report) . Rising rate worries, thanks to economic improvement and overvaluation concerns, have been punishing growth stocks this year.

But is Everything Gloomy About Growth ETFs?

Now the big question is how long growth stocks will remain subdued and if there are reasons for a rebound in the near term. Below we highlight a few factors that say that the fear for growth stock investing is exaggerated.

Focus on Technology is a Boon

Most of the growth ETFs are heavy on the technology sector. After a successful run in 2020, thanks to rising digitization amid social distancing caused by the coronavirus-led lockdowns, tech ETFs have been facing a slowdown this year on overvaluation concerns. This, in turn, in weighing on growth ETFs.

However, the technology sector has evolved as a long-term bet. Digitization is part and parcel of the modern era and thus tech will rebound in the coming days. The sector holds strong potential on the fast emergence of the fourth industrial revolution.

Also, virus cases are rising in Europe and some emerging economies like India. Easing of lockdowns is being rolled back and further lockdowns are being imposed in many countries. Here, the tech sector is likely to stage a comeback as social distancing and stay-at-home operations will increase dependence on digitization.

Talks of Capital Gain Tax Hike May Favor Growth Stocks

The President plans to hike the corporate tax rate to 28% from 21% in the United States. Biden is also proposing a hike in capital gains taxes. Those earning $1 million or more annually would have to incur capital gains tax on stocks at 39% — the ordinary income-tax rate — versus the current capital-gains tax rate of 20% (read: Tax Hike Not a Big Concern? Play S&P 500 ETFs).

However, the hike in capital gains taxes should not impact markets over the long term. Per market watchers, an increase in capital gain taxes would surely impact stock market valuations. Investors may only be willing to pay a lower multiple for near-term profits as the after-tax return would be lowered, per a barrons.com article. Since growth stocks’ cash flows come way out in the future, a scenario of capital gains tax hike should not be as painful as it will be for value stocks.

Current Rates Are Not High Enough to Cause Market Disruptions

In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF SPYG, we will see the fund returning 10.3% during that period.

Currently, yields are around slightly higher than the 1.7% level, which means rates are pretty low at the current level. Growth stocks should survive such yields seamlessly in the near term. Furthermore, rising virus cases globally, tax hike fears in the United States and U.S.-China tensions could keep the global markets edgy, boost flight to safety and bring down the benchmark U.S. treasury yield in the near term. If rates remain subdued in the near term on rising demand for safe havens, growth sectors like technology should move higher.

Hence, investors can tap the below-mentioned growth ETFs shedding all fears.

ETFs in Focus

SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) – Zacks Rank #1 (Strong Buy)

Invesco S&P 500 GARP ETF (SPGP - Free Report) – Zacks Rank #1

Fidelity Nasdaq Composite Index ETF (ONEQ - Free Report) – Zacks Rank #1

Invesco QQQ (QQQ - Free Report) – Zacks Rank #1

Vanguard Growth ETF (VUG - Free Report) – Zacks Rank #1

Vanguard Mega Cap Growth ETF (MGK - Free Report) – Zacks Rank #1

Schwab U.S. LargeCap Growth ETF (SCHG - Free Report) – Zacks Rank #1

Invesco S&P 500 Pure Growth ETF (RPG - Free Report) – Zacks Rank #1

Vanguard Russell 1000 Growth ETF (VONG - Free Report) – Zacks Rank #1

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