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Growth ETFs to Buy as Easing Inflation Fuels Rate Cut Bets

Inflation in the United States cooled down for the first time in six months, sparking new bets on Fed rate cuts as soon as September. According to the CME FedWatch Tool, around 70% of traders now expect at least one cut by the September meeting, a notable increase from a week ago. This has powered a stock market rally as all three major indices set new records. In fact, the S&P 500 closed above 5,300 for the first time ever.

Investors seeking to capitalize on this trend could invest in growth ETFs. While there are many ETFs in the space targeting the growth segment, we have highlighted the five most popular options. These have a Zacks ETF Rank #2 (Buy), suggesting their continued outperformance. These include Invesco QQQ QQQ, Vanguard Growth ETF VUG, iShares Russell 1000 Growth ETF IWF, iShares S&P 500 Growth ETF IVW and Schwab U.S. Large-Cap Growth ETF SCHG.

Low rates are generally favorable for growth stocks as they reduce the cost of borrowing, often needed to finance the expansion of companies. Lower rates typically reduce the attractiveness of fixed-income investments like bonds, leading investors to seek higher returns in the equity markets. Growth stocks, with their potential for high returns, become more appealing to investors in this environment, driving up demand and, consequently, their prices (read: Fed Stays Put, Provides Nuanced Outlook: ETFs Likely to Win).

Behind the Inflation Numbers

The Consumer Price Index rose 3.4% year over year in April, down from the annual rise of 3.5% in March. The index rose 0.3% from last month, a slight deceleration from 0.4% month-over-month increase.

About 70% of the monthly increase in consumer prices came from an uptick in gasoline and housing costs. Gasoline prices shot up 2.8%, while shelter prices, which make up about one-third of the CPI weighting, increased 0.4% for the third month.

On the other hand, food prices were flat month over month in April. Food at home decreased 0.2%, while food away from home rose 0.3%. Prices for some grocery store staples such as eggs, meat, fish, fruits and vegetables and nonalcoholic beverages fell in April. Used cars and truck prices dropped for a second consecutive month. New motor vehicle prices clocked a third straight monthly decline. Prices for household furnishings and operations also fell.

The so-called core inflation, which strips out volatile components such as food and energy prices, increased 3.6% year over year, the slowest pace since April 2021 and followed a 3.8% annual rise in March. On a month-on-month basis, core inflation increased 0.3%, below 0.4% growth seen in March.

The data has bolstered hopes of the Fed interest rate cuts in September. Following the release of the data, the CME FedWatch Tool showed that markets were pricing in a roughly 53% chance of the Fed beginning to cut rates at its September meeting (read: 5 Beaten-Down Top-Ranked ETFs to Buy for a Turnaround).

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 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.

ETFs to Buy

Invesco QQQ (QQQ)

Invesco QQQ provides exposure to 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 $260.5 billion and an average daily volume of 40 million shares. Invesco QQQ charges investors 20 bps in annual fees (read: ETFs to Tap as Investors Turn Most Bullish Since November 2021).

Vanguard Growth ETF (VUG)

Vanguard Growth ETF offers exposure to the growth segment of large-cap equities and follows the CRSP US Large Cap Growth Index. Vanguard Growth ETF holds 200 stocks in its basket, with key holdings in the technology sector at 56.4% and consumer discretionary at 19.1%. Vanguard Growth ETF has AUM of $121.7 billion and an average daily volume of 989,000 shares. It charges 4 bps in fees per year.

iShares Russell 1000 Growth ETF (IWF)

iShares Russell 1000 Growth ETF provides exposure to large and mid-capitalization U.S. equities that exhibit growth characteristics by tracking the Russell 1000 Growth Index. It holds 440 securities in its basket with a tilt toward the information technology sector, while consumer discretionary, communication and healthcare receive double-digit exposure each. With AUM of $89.3 million, iShares Russell 1000 Growth ETF trades in heavy volume of around 1.2 million shares a day on average and charges 19 bps in annual fees.

iShares S&P 500 Growth ETF (IVW)

iShares S&P 500 Growth ETF tracks the S&P 500 Growth Index and holds 228 stocks in its basket. It is heavily concentrated on the top firm, with double-digit exposure. iShares S&P 500 Growth ETF is skewed toward information technology at 47.5%, while consumer discretionary and communication round off the next two spots with a double-digit exposure each. iShares S&P 500 Growth ETF charges 18 bps in annual fees and has amassed $44.4 billion in its asset base. The fund trades in an average daily volume of 4 million shares.

Schwab U.S. Large-Cap Growth ETF (SCHG)

With AUM of $27.4 billion, Schwab U.S. Large-Cap Growth ETF follows the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. It holds 250 stocks in its basket, with a large concentration on the top two firms. From a sector look, information technology takes the top spot at 46.1% share, while communication services, consumer discretionary and health care receive double-digit exposure each in the portfolio. Schwab U.S. Large-Cap Growth ETF charges 4 bps in annual fees and sees an average volume of around 1.24 million shares a day.


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Invesco QQQ (QQQ): ETF Research Reports

iShares Russell 1000 Growth ETF (IWF): ETF Research Reports

Vanguard Growth ETF (VUG): ETF Research Reports

Schwab U.S. Large-Cap Growth ETF (SCHG): ETF Research Reports

iShares S&P 500 Growth ETF (IVW): ETF Research Reports

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Zacks Investment Research