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Growth ETFs to Shine as Fed Hints at End of Rate Hike Era
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Jerome Powell, the Federal Reserve Chair, ushered in a wave of optimism among investors regarding the possible end of rate hikes. This sentiment has sparked a notable rally in the U.S. stock market. The Nasdaq gains with a 1.6% gain, while the Dow Jones Industrial Average and the S&P 500 closed higher, adding 0.7% and 1%, respectively.
The rally was broad-based, with rate-sensitive sectors like information technology and communications services leading the gains, rising by 2% and 1.8%, respectively. The hawkish longer-term rate outlook previously provided by the Fed was a cause for concern among investors but the latest decisions and comments from the Federal Reserve Chair Jerome Powell have somewhat alleviated these fears (read: 5 Stocks in ETF That Defied S&P 500's Longest Slide Since 2020).
Latest Fed Action
In the latest FOMC meeting, which ended on Nov 1, the Fed decided to hold interest rates steady, a move that many market analysts and investors have interpreted as a hint of the end of the rate hike era, at least for the near term. The Fed upgraded its assessment of the economy to "strong" in the third quarter from "solid" in September. "Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated."
Following the Fed announcement, feds futures markets trimmed bets on rate hikes by about 20% for December and 25% for January, with a notable shift in expectations toward rate cuts beginning as early as June 2024. Markets have priced in a 70% chance that the tightening is over and rate cuts could amount to 85 bps next year, beginning as soon as June.
In such a scenario, investing in growth ETFs seems to be the better choice.
Why Growth?
Growth investing focuses on capital appreciation rather than annual income or dividends. It is a stock-buying strategy that aims to profit from companies that grow at above-average rates compared to their industry or the market. This is a more active attempt versus the value to build up the portfolio and generate more return on the capital investment.
Growth funds generally tend to outperform during an uptrend. However, these funds offer exposure to stocks with growth characteristics that have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility, especially compared to value stocks (read: 5 Sector ETFs That Gained in Turbulent October).
While there are many ETFs in the space targeting the growth segment, we have highlighted five of them that led the way higher on Nov 1 and have Zacks ETF Rank #2 (Buy).
Invesco NASDAQ 100 ETF is identical to QQQ tracking the NASDAQ-100 Index but comes with lower annual fees of 15 bps. It holds 103 securities in its basket and has accumulated $14.5 billion in its asset base.
Invesco QQQ provides exposure to the 101 largest domestic and international non-financial companies listed on the Nasdaq by tracking the Nasdaq 100 Index. It is one of the largest and most popular ETFs in the large-cap space, with an AUM of $193.7 billion. Invesco QQQ charges investors 20 bps in annual fees.
Vanguard Mega Cap Growth ETF (MGK - Free Report) ) – Up 1.7%
Vanguard Mega Cap Growth ETF provides exposure to the largest-capitalization growth stocks in the United States and tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket. Vanguard Mega Cap Growth ETF charges 7 bps in annual fees and has AUM of $13.6 billion.
iShares Russell Top 200 Growth ETF (IWY - Free Report) ) – Up 1.7%
iShares Russell Top 200 Growth ETF offers exposure to large U.S. companies that are expected to grow at an above-average rate relative to the market. It tracks the Russell Top 200 Growth Index, holding 111 stocks in its basket. iShares Russell Top 200 Growth ETF has amassed $7 billion in its asset base and has an expense ratio of 0.20% (read: S&P 500 in Correction Zone: Time to Buy ETFs?).
Invesco Large Cap Growth ETF (PWB - Free Report) ) – Up 1.7%
Invesco Large Cap Growth ETF follows the Dynamic Large Cap Growth Intellidex Index, holding 51 stocks in its basket. It has AUM of $611.2 million and charges 56 bps in annual fees.
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Growth ETFs to Shine as Fed Hints at End of Rate Hike Era
Jerome Powell, the Federal Reserve Chair, ushered in a wave of optimism among investors regarding the possible end of rate hikes. This sentiment has sparked a notable rally in the U.S. stock market. The Nasdaq gains with a 1.6% gain, while the Dow Jones Industrial Average and the S&P 500 closed higher, adding 0.7% and 1%, respectively.
The rally was broad-based, with rate-sensitive sectors like information technology and communications services leading the gains, rising by 2% and 1.8%, respectively. The hawkish longer-term rate outlook previously provided by the Fed was a cause for concern among investors but the latest decisions and comments from the Federal Reserve Chair Jerome Powell have somewhat alleviated these fears (read: 5 Stocks in ETF That Defied S&P 500's Longest Slide Since 2020).
Latest Fed Action
In the latest FOMC meeting, which ended on Nov 1, the Fed decided to hold interest rates steady, a move that many market analysts and investors have interpreted as a hint of the end of the rate hike era, at least for the near term. The Fed upgraded its assessment of the economy to "strong" in the third quarter from "solid" in September. "Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated."
Following the Fed announcement, feds futures markets trimmed bets on rate hikes by about 20% for December and 25% for January, with a notable shift in expectations toward rate cuts beginning as early as June 2024. Markets have priced in a 70% chance that the tightening is over and rate cuts could amount to 85 bps next year, beginning as soon as June.
In such a scenario, investing in growth ETFs seems to be the better choice.
Why Growth?
Growth investing focuses on capital appreciation rather than annual income or dividends. It is a stock-buying strategy that aims to profit from companies that grow at above-average rates compared to their industry or the market. This is a more active attempt versus the value to build up the portfolio and generate more return on the capital investment.
Growth funds generally tend to outperform during an uptrend. However, these funds offer exposure to stocks with growth characteristics that have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility, especially compared to value stocks (read: 5 Sector ETFs That Gained in Turbulent October).
While there are many ETFs in the space targeting the growth segment, we have highlighted five of them that led the way higher on Nov 1 and have Zacks ETF Rank #2 (Buy).
Invesco NASDAQ 100 ETF (QQQM - Free Report) ) – Up 1.8%
Invesco NASDAQ 100 ETF is identical to QQQ tracking the NASDAQ-100 Index but comes with lower annual fees of 15 bps. It holds 103 securities in its basket and has accumulated $14.5 billion in its asset base.
Invesco QQQ (QQQ - Free Report) ) – Up 1.7%
Invesco QQQ provides exposure to the 101 largest domestic and international non-financial companies listed on the Nasdaq by tracking the Nasdaq 100 Index. It is one of the largest and most popular ETFs in the large-cap space, with an AUM of $193.7 billion. Invesco QQQ charges investors 20 bps in annual fees.
Vanguard Mega Cap Growth ETF (MGK - Free Report) ) – Up 1.7%
Vanguard Mega Cap Growth ETF provides exposure to the largest-capitalization growth stocks in the United States and tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket. Vanguard Mega Cap Growth ETF charges 7 bps in annual fees and has AUM of $13.6 billion.
iShares Russell Top 200 Growth ETF (IWY - Free Report) ) – Up 1.7%
iShares Russell Top 200 Growth ETF offers exposure to large U.S. companies that are expected to grow at an above-average rate relative to the market. It tracks the Russell Top 200 Growth Index, holding 111 stocks in its basket. iShares Russell Top 200 Growth ETF has amassed $7 billion in its asset base and has an expense ratio of 0.20% (read: S&P 500 in Correction Zone: Time to Buy ETFs?).
Invesco Large Cap Growth ETF (PWB - Free Report) ) – Up 1.7%
Invesco Large Cap Growth ETF follows the Dynamic Large Cap Growth Intellidex Index, holding 51 stocks in its basket. It has AUM of $611.2 million and charges 56 bps in annual fees.