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Growth stocks refer to shares of companies that are expected to grow at an above-average rate compared to other companies in the market. These companies typically reinvest their earnings back into the business to fuel expansion, rather than paying out dividends to shareholders.
Last year, U.S. growth stocks faced difficulties due to surging inflation, which impacted their high valuations resulting from extensive policy easing following the COVID-19 outbreak. Despite repeated attempts to recover losses, investors maintained a cautious stance towards making significant investments in growth stocks.
However, the scenario has been changing now. And now could be the time to invest in growth stocks and ETFs. Let’s delve a little deeper.
Slowing Inflation and the Potential for Rate Hike Pauses
The annual inflation rate in the United States dropped to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. The U.S. annual producer inflation eased for 10 months in a row to 2.3% in April of 2023, the lowest since January of 2021, and below forecasts of 2.4% as commodity prices continue to decline and supply chains have improved (read: ETF Areas to Benefit/Lose from Cooling U.S. inflation).
The impact of slowing inflation on growth stocks: When inflation slows down, it can benefit growth stocks as their future earnings become more valuable in comparison to their present value. This creates a favorable environment for growth-oriented companies.
The Federal Reserve's stance and its influence on growth investing: If the Federal Reserve decides to slow or pause rate hikes due to slowing inflation, it reduces the cost of borrowing for companies, enabling them to invest more in growth initiatives. This can potentially drive the performance of growth stocks and ETFs.
Access to High-Growth Sectors and Innovative Companies
Growth stocks and innovation often go hand in hand. When a company introduces innovative products, services, or business models, it can gain a competitive edge, attract more customers, and increase its market share. This growth potential often translates into higher stock prices, making innovative companies attractive to investors.
Identifying sectors with significant growth potential: Growth ETFs often focus on sectors and industries with promising growth prospects, such as artificial intelligence, clean energy, cloud computing, and genomics. By investing in these ETFs, investors can gain exposure to companies at the forefront of innovation and disruptive technologies.
Correction in Valuation
The year 2022 witnessed a sharp correction in the valuation of growth stocks, as investors dumped them amid a market rout in Wall Street. However, this also created an opportunity for bargain hunters in 2023, as growth stocks now trade at relatively lower multiples compared to their historical averages.
The valuation of growth QQQ ETF has fluctuated significantly from 2020 to 2022: According to historical data from Yahoo Finance, the QQQ ETF had a closing price of $212.61 on December 31, 2019, and a closing price of $313.74 on December 31, 2020, representing a 47.5% increase in valuation. However, in 2022, the QQQ ETF experienced a sharp decline, reaching a closing price of $288.55 on March 10, 2023, which was an 8% decrease from the end of 2020. Therefore, the valuation of QQQ ETF got corrected by about -39.5% from 2020 to 2022.
Bottom Line
The cues of cooling Fed rate hike momentum should bode well for growth investing as the segment has suffered a lot in 2022. A buy-the-dip strategy could be beneficial for the segment. Against this backdrop, below we highlight a few top-ranked growth ETFs that have outperformed the Nasdaq-100 ETF QQQ (up 22.5%) this year and may exhibit an uptrend in the coming days if the inflation figures keep coming low.
Image: Bigstock
Time for Growth ETF Investing?
Growth stocks refer to shares of companies that are expected to grow at an above-average rate compared to other companies in the market. These companies typically reinvest their earnings back into the business to fuel expansion, rather than paying out dividends to shareholders.
Last year, U.S. growth stocks faced difficulties due to surging inflation, which impacted their high valuations resulting from extensive policy easing following the COVID-19 outbreak. Despite repeated attempts to recover losses, investors maintained a cautious stance towards making significant investments in growth stocks.
However, the scenario has been changing now. And now could be the time to invest in growth stocks and ETFs. Let’s delve a little deeper.
Slowing Inflation and the Potential for Rate Hike Pauses
The annual inflation rate in the United States dropped to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. The U.S. annual producer inflation eased for 10 months in a row to 2.3% in April of 2023, the lowest since January of 2021, and below forecasts of 2.4% as commodity prices continue to decline and supply chains have improved (read: ETF Areas to Benefit/Lose from Cooling U.S. inflation).
The impact of slowing inflation on growth stocks: When inflation slows down, it can benefit growth stocks as their future earnings become more valuable in comparison to their present value. This creates a favorable environment for growth-oriented companies.
The Federal Reserve's stance and its influence on growth investing: If the Federal Reserve decides to slow or pause rate hikes due to slowing inflation, it reduces the cost of borrowing for companies, enabling them to invest more in growth initiatives. This can potentially drive the performance of growth stocks and ETFs.
Access to High-Growth Sectors and Innovative Companies
Growth stocks and innovation often go hand in hand. When a company introduces innovative products, services, or business models, it can gain a competitive edge, attract more customers, and increase its market share. This growth potential often translates into higher stock prices, making innovative companies attractive to investors.
Identifying sectors with significant growth potential: Growth ETFs often focus on sectors and industries with promising growth prospects, such as artificial intelligence, clean energy, cloud computing, and genomics. By investing in these ETFs, investors can gain exposure to companies at the forefront of innovation and disruptive technologies.
Correction in Valuation
The year 2022 witnessed a sharp correction in the valuation of growth stocks, as investors dumped them amid a market rout in Wall Street. However, this also created an opportunity for bargain hunters in 2023, as growth stocks now trade at relatively lower multiples compared to their historical averages.
The valuation of growth QQQ ETF has fluctuated significantly from 2020 to 2022: According to historical data from Yahoo Finance, the QQQ ETF had a closing price of $212.61 on December 31, 2019, and a closing price of $313.74 on December 31, 2020, representing a 47.5% increase in valuation. However, in 2022, the QQQ ETF experienced a sharp decline, reaching a closing price of $288.55 on March 10, 2023, which was an 8% decrease from the end of 2020. Therefore, the valuation of QQQ ETF got corrected by about -39.5% from 2020 to 2022.
Bottom Line
The cues of cooling Fed rate hike momentum should bode well for growth investing as the segment has suffered a lot in 2022. A buy-the-dip strategy could be beneficial for the segment. Against this backdrop, below we highlight a few top-ranked growth ETFs that have outperformed the Nasdaq-100 ETF QQQ (up 22.5%) this year and may exhibit an uptrend in the coming days if the inflation figures keep coming low.
ETF Areas in Focus
Blockchain
Global X Blockchain ETF (BKCH - Free Report) – Up 86.9%
Global X Blockchain & Bitcoin Strategy ETF (BITS - Free Report) – Up 75.2%
FANG+
MicroSectors FANG+ ETN (FNGS - Free Report) – Up 43.3%
ARK Next Generation Internet ETF (ARKW - Free Report) – Up 29.7%
Broader Technology
iShares U.S. Technology ETF (IYW - Free Report) – Up 26.7%
SPDR NYSE Technology ETF (XNTK - Free Report) – Up 23.7%
Blue-Chip Growth
Fidelity Blue Chip Growth ETF (FBCG - Free Report) – Up 23.2%
Vanguard Mega Cap Growth ETF (MGK - Free Report) – Up 22.6%