After a bumpy ride last week on the coronavirus outbreak, Wall Street is once again scaling new highs buoyed by positive news from China and the United States. Amid such scenario, growth investing seems the most compelling strategy (read: ETF Strategies to Play the Wall Street Rally).
This is especially true as growth stocks are momentum plays and tend to outperform in a trending market (a market characterized by a prolonged uptrend). These refer to high-quality stocks that are likely to witness revenue and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices.
Positive News Flow
China has pledged to halve tariffs on some $75 billion of U.S. imports, beginning Feb 14, as part of its phase-one trade deal with the United States. Tariffs on some U.S. goods will be cut to 5% from 10%, while levies on some other items will be reduced to 2.5% from 5%, per China’s Ministry of Finance. The tariffs were imposed in September and December during a brutal trade fight between the world’s two largest economies.
Also, the People’s Bank of China has injected $1.7 trillion yuan ($242.9 billion) into the economy via reverse repos and unexpectedly lowered interest rates on reverse repurchase agreements by 10 basis points (bps) to prop up the cononavirus-affected economy.
Bouts of strong U.S. economic data and solid corporate earnings reports also boosted investors’ confidence in the economy and the stock market. The U.S. manufacturing sector, which had languished in contraction territory for five months, has rebounded strongly with the Institute for Supply Management’s PMI rising to 50.9 in January from a December reading of 47.8. Services sector activity also picked up in January, with industries reporting increases in new orders, suggesting the economy could continue to grow moderately this year. New orders for U.S. manufactured goods also rose in December at the fastest pace in more than a year (read: U.S. Manufacturing Back to Health: ETF Winners & Losers).
Meanwhile, fourth-quarter results so far have been better than expected. Earnings for 70.3% of the S&P 500 market capitalization are up 0.4% year over year on 3.0% higher revenues, with 70.7% beating on earnings and 67.3% surpassing revenue estimates. While the proportion of companies beating earnings estimates is tracking below the same group of 266 index members a year ago, the revenue beat percentage is notably above historical periods.
ETFs to Play
Given the bullishness, investors seeking to capitalize on the strong trends should consider growth ETFs. However, it is worth noting that 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 when compared to value stocks.
Below, we have presented a bunch of ETFs that have top Zacks ETF Rank #1 (Strong Buy) and will continue to outperform if the bullish trend prevails.
iShares Core S&P U.S. Growth ETF (IUSG - Free Report)
This product tracks the S&P 900 Growth Index and is home to 504 stocks. It has accumulated $8.3 billion in its asset base and charges 4 bps in annual fees (read: Why You Should Buy Growth ETFs Now).
iShares Russell Top 200 Growth ETF (IWY - Free Report)
This fund offers exposure to 127 large U.S. companies by tracking the Russell Top 200 Growth Index. It has AUM of $1.9 billion and expense ratio of 0.20%.
Vanguard Growth ETF (VUG - Free Report)
With AUM of $50.7 billion, this fund follows the CRSP US Large Cap Growth Index. It holds 280 stocks in its basket and charges 4 bps in annual fees.
Vanguard Mega Cap Growth ETF (MGK - Free Report) )
This ETF targets the mega-cap segment of the broad U.S. stock market and follows the CRSP US Mega Cap Growth Index. It holds 114 stocks in its basket. The fund charges 7 bps in annual fees and has AUM of $5.7 billion (read: 5 Winning ETF Strategies for 2020).
SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report)
This fund offers exposure to S&P 500 companies that exhibit the strongest growth characteristics based on sales growth, earnings change to price ratio and momentum. It holds 272 stocks in its basket and charges 4 bps in annual fees. The ETF has amassed $6.7 billion in its asset base.
Vanguard Russell 1000 Growth ETF (VONG - Free Report)
With AUM of $3.6 million, this ETF tracks the Russell 1000 Growth Index, charging investors 8 bps in annual fees. It holds a basket of 529 stocks.
iShares Russell Top 200 Growth ETF (IWY - Free Report)
This fund follows the Russell Top 200 Growth Index and offers exposure to 127 large U.S. companies. It has AUM of $5.2 billion and expense ratio of 0.20%.
iShares Russell 2000 Growth ETF (IWO - Free Report)
This fund offers exposure to small-cap growth companies by tracking the Russell 2000 Growth Index. It holds a broad basket of 1,164 securities with AUM of $9.9 billion and expense ratio of 0.24% (read: 5 Small-Cap ETFs Beating S&P 500 in 2020).
iShares Morningstar Small-Cap Growth ETF (JKK - Free Report)
This product also targets small-cap growth segment of the broad market and follows Morningstar Small Growth Index. It holds 227 stocks in its basket and charges 30 bps in annual fees. The fund has amassed $231 million in its asset base.
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