A Better Way to Bet on Growth Stocks

NEW YORK (TheStreet) -- Growth stocks have been outdoing value lately, and plenty of financial advisors think the trend will continue. With the economy sluggish, investors will gravitate to companies with reliable earnings, advisors argue. If you want to emphasize growth, you can buy an ETF like SPDR S&P 500 Growth (SPYG) or Vanguard Growth (VUG)

For even more juice in a growth rally, consider a pure fund like Guggenheim S&P 500 Pure Growth (RPG) or iShares Morningstar Large Growth (JKE). "If you decide to bet on growth--and you have a lot of conviction--then pure funds are the way to go," says Matt Hougan, president of ETF analytics for IndexUniverse.com.

Pure funds provide a concentrated dose of an asset class. That can boost returns when the sector rallies. During the rebound of 2009, the Guggenheim pure ETF rose 50.1%, while the conventional SPDR S&P 500 Growth returned 37.1%. Whether or not they lead over the short-term, the pure funds can make sound choices for investors who are looking to emphasize a sector or diversify a portfolio.

Besides pure growth funds, companies have also introduced pure value ETFs. Those tend to outperform when value stocks lead the markets. Choices include PowerShares Fundamental Pure Large Value (PXLV) and Guggenheim S&P Smallcap 600 Pure Value (RZV). When small value funds soared in 2010, the Guggenheim pure fund returned 28.6%, compared to 24.7% for iShares S&P SmallCap 600 Value (IJS), a conventional fund.

Some of the pure funds have recorded sound long-term track records. During the past five years, Guggenheim S&P 500 Pure Growth returned 4.1%, compared to 2.7% for the conventional SPDR growth fund. But pure funds tend to trail conventional peers when their sector is out of favor. If value leads for the next five years, then the pure growth funds could be laggards.

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Pure funds can deliver extra juice because of their unusual construction. To build growth and value portfolios, conventional funds divide the universe roughly in half. Stocks with faster earnings or higher prices go in the growth basket, while lower-priced shares go into value. But some stocks have a mix of growth and value traits. These blend stocks can be placed in both growth and value funds. The blend group includes such familiar names as Exxon Mobil (XOM) and Microsoft (MSFT), which are in both SPDR S&P 500 Growth and SPDR S&P 500 Value (SPYV).

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