4 Cheaper Growth ETFs for Retail Investors

U.S. economic news is flowing in favor of growth stocks and exchange-traded funds (ETFs). First, weak July jobs data and then a cooler CPI print are likely to help the Fed keep rates the same in the September meeting and boost growth ETFs ahead.

Lower Rate-Hike Risk Helps Growth Stocks

July's CPI was encouraging as headline inflation rose 3.4% year over year, while core CPI eased to 2.5%, in line with expectations and down a tenth of a percentage point from June. Core CPI rose 0.2% sequentially, also in line with expectations, as quoted on Yahoo Finance. The data reduces the urgency for the Fed to raise rates in September.

This matters because growth companies derive a larger portion of their valuation from future earnings and cash flows. When interest-rate expectations decline, those future cash flows become more valuable.

Labor Market Is Cooling

July payrolls unexpectedly fell by 23,000, reinforcing the argument that the Fed may not need to tighten policy further. Treasury yields also fell after the jobs report (read: Likely ETF & Stock Winners From July Jobs Report).

That creates a potentially favorable environment for growth stocks. A slowing economy and cooling inflation create a favorable backdrop for growth stocks as they put less pressure on the Fed to hike rates. Note that the economy doesn't have to fall into a deep recession. A "soft landing" is particularly favorable for growth.

Growth ETFs Are More Sensitive to Interest Rates

Technology and other growth companies typically have high valuations because investors expect strong earnings several years into the future. Higher interest rates increase the discount rate applied to those future earnings. That's why growth ETFs can benefit more from falling rate expectations than many value-oriented funds.

Growth Could Regain Leadership?

Growth stocks had faced pressure from elevated Treasury yields and concerns about inflation. The tech-heavy Nasdaq-100 ETF – Invesco QQQ Trust, Series 1 QQQ – has gained only 1.9% over the past month against 2.5% gains in the value-oriented State Street SPDR Dow Jones Industrial Avg ETF Trust DIA.

But the latest inflation and jobs data are shifting the narrative. If yields continue moving lower, growth ETFs could outperform value again and reassume the market leadership.

How Will Cheaper Growth ETFs be Useful?

Amid a surging market, below we highlight a few growth ETFs that are trading under $400, have an expense ratio less than the Nasdaq-100’s fees of 0.18% and a price/earnings ratio less than the Nasdaq-100’s value of 30.95X (per Yahoo Finance).

Note that the largest growth ETF, QQQ, currently trades at more than $723 a share. Hence, the below-mentioned cheaper ETFs could prove to be useful and accessible ways for everyday retail investors, often referred to as "mom-and-pop" investors.

ETFs in Focus

State Street SPDR Portfolio S&P 500 Growth ETF SPYG

Zacks Rank #2 (Buy)

Price: $122.47

Expense ratio: 0.04%

P/E: 28.64X

YTD Return: 14.7%

Vanguard S&P Mid-Cap 400 Growth Index Fund ETF Shares IVOG

Zacks Rank #2

Price: $147.32

Expense ratio: 0.10%

P/E: 28.21X

YTD Return: 20.8%

State Street SPDR S&P 400 Mid Cap Growth ETF MDYG

Zacks Rank #2

Price: $112.86

Expense ratio: 0.15%

P/E: 28.09X

YTD Return: 20.1%

Invesco NASDAQ Next Gen 100 ETF QQQJ

Zacks Rank #3 (Hold)

Price: $46.57

Expense ratio: 0.15%

P/E: 25.64X

YTD Return: 24.1%

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This article originally published on Zacks Investment Research (zacks.com).

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