What do you get when you buy a growth ETF?

• Level: For beginners
• Reading duration: 3 minutes

Growth companies are the shooting stars of the investment universe. They are the firms that are burning brightest and moving fastest although many will fall to Earth before long. Growth firms have typically enjoyed strong earnings, sales, cash flow and book value growth in comparison to their size and have outstripped the overall economy. What’s more, their strong growth is expected to continue into the future as they expand rapidly to exploit new commercial opportunities in fast-moving markets. The poster boys for growth tend to be tech firms like Uber or Facebook. Google is the classic growth stock: expected to enjoy stellar growth in its earnings and cash flows well into the future. As such, investors will often pay high prices for growth stocks in comparison to their current earnings because they believe these companies will be able to reap much higher rewards in the years ahead. A growth ETF tracks an index focused on the fortunes of stocks with characteristics similar to those described above. Although it’s always best to check the methodology of the index for any ETF you are considering as they all differ to some degree. Income seekers, for example, should avoid growth ETFs as they pay little in the way of dividends. Growth firms generally invest their cash straight back into the company because expansion is more profitable than returning money to shareholders. On the other hand, growth ETFs are expected to deliver high capital gains in the future as their constituent firms fulfil their promise. It’s also worth noting that growth investments are generally considered to be more volatile than value and broad market products. Many growth firms fail to live up to their early hype and often a few meteoric performers will generate most of the returns – think of how Google and Facebook dominate their rivals. To find growth ETFs, go to the justETF screener and click on the Equity drop-down underneath All Asset Classes at the top of the left-hand column. Then choose Growth from the Equity Strategy drop-down to see the choice available.