Investing in Growth Stocks -- With Ease

Investing in Growth Stocks -- With Ease

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some growth stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Growth ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.10%.

This ETF aspires to beat the S&P 500 soundly, but over the past three and five years, it has slightly underperformed and outperformed it, respectively. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why growth?
It's smart to seek undervalued stocks, as value investors do. But it can also be appealing to add some "growth" stocks to your portfolio in the hope of juicing its overall performance. Growth stocks offer significant growth potential, and some of them are undervalued.

More than a handful of rapidly growing companies had strong performances over the past year. Gilead Sciences surged 131%, for example, with investors hopeful about its oral hepatitis C drug, sofosbuvir, which has cleared four phase 3 trials and received priority-review designation from the FDA. The company has also been doing well with its HIV drugs in recent years, though sales of some have been flagging and competition looms. The stock may not look like a bargain with a P/E ratio in the 30s, but its five-year projected earnings growth rate is around 26%.

Biotech giant Amgen popped 42%. Bulls are excited about drugs in its pipeline that tackle melanoma and ovarian cancer, among other diseases. Amgen is also looking to acquire Onyx Pharmaceuticals, which would bring with it more cancer treatments and success in getting drugs approved for multiple indications. (Others are eyeing Onyx as well.) Some see Amgen now so big that it can't grow as rapidly as its smaller biotech brethren. But it does offer a solid dividend yield of 1.8% and seems more attractively valued than many rivals.

Qualcomm , a top player in the smartphone world, gained 12%, supplying iDevices and Android devices alike with its chips. The company just posted third-quarter earnings, featuring revenue and earnings each up more than 30%. Bulls like its expansion into the health-care industry and telemedicine. Qualcomm recently hiked its dividend by 40%, and its yield is now at 2.3%. The stock's P/E ratio near 17 and its forward P/E near 13 are both well below its five-year average of 24 .

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Domestic tobacco giant Altria , for example, gained 8% and yields 4.8%. This company has an impressive history, but its growth prospects are more constrained these days, due to rising taxes, regulations, competition from discount cigarettes, and a shrinking smoker base. In its latest quarter, revenue shrank 3% while earnings rose 5%. Meanwhile, the latest news in the tobacco industry is that the FDA might tighten regulations on (or even ban ) menthol cigarettes, which many see as a gateway smoke for young people. A ray of hope for tobacco companies is the growth of electronic cigarettes.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.


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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Qualcomm and Gilead Sciences. The Motley Fool recommends Gilead Sciences and owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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