Fed Initiates Rate Cuts: Top-Ranked Growth ETFs to Buy

Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50 basis points cut in interest rates after holding it at a 23-year high for 14 consecutive months since July 2023. 

This marked the first rate cut since 2020 to address slowing economic growth and showed greater confidence in the fact that inflation is moving sustainably toward the 2% target level.

An interest rate cut by the Fed would boost demand in the world's largest economy. 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) each, suggesting their continued outperformance. 

These include Vanguard Growth ETF (VUG Quick QuoteVUG - Free Report) , iShares Russell 1000 Growth ETF (IWF Quick QuoteIWF - Free Report) , iShares Core S&P U.S. Growth ETF (IUSG Quick QuoteIUSG - Free Report) , iShares Morningstar Growth ETF (ILCG Quick QuoteILCG - Free Report) and Vanguard Mega Cap Growth ETF (MGK Quick QuoteMGK - Free Report) .

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.

More Cuts in Cards

The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It indicates another 100 bps rate cut next year and a 50 bps cut in 2026, which means four rate cuts in 2025 and two in 2026 (read: 5 ETF Zones Set to Benefit When Fed Initiates Rate Cuts).

The rate cut is “a welcome development” and should put the stock market on good footing going forward. This shift in the monetary policy approach aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.

Why Growth?

Growth stocks are associated with high revenue expansion and innovation-driven businesses. They often need capital to fuel expansion, such as investing in new technologies, scaling operations, or pursuing research and development. As such, they may rely on external financing through debt or equity to fund this growth. Lower rates make it cheaper for these companies to access credit, improving their ability to invest in long-term projects. This can accelerate their growth trajectory, further justifying higher valuations.
    
A low-rate environment reduces the cost of capital, increases the present value of future earnings, and shifts investor preferences toward higher-risk, higher-return investments. This combination makes growth stocks, with their potential for substantial future profit, particularly attractive when rates are low. Thus, these stocks often outperform other asset classes, such as value stocks, during such periods.

ETFs to Buy

Vanguard Growth ETF (VUG Quick QuoteVUG - Free Report)  

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 188 stocks in its basket, with key holdings in the technology sector at 59.4% and consumer discretionary at 16.6%. Vanguard Growth ETF has AUM of $138.3 billion and an average daily volume of 1 million shares. It charges 4 bps in fees per year (read: 5 Growth ETFs to Buy as Inflation Drops to a 3-Year Low).

iShares Russell 1000 Growth ETF (IWF Quick QuoteIWF - Free Report)  

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 394 securities in its basket with a tilt toward the information technology sector, while consumer discretionary and communication have double-digit exposure each. With AUM of $96.5 million, iShares Russell 1000 Growth ETF trades in a heavy volume of around 1.2 million shares a day on average and charges 19 bps in annual fees. 

iShares Core S&P U.S. Growth ETF (IUSG Quick QuoteIUSG - Free Report)

iShares Core S&P U.S. Growth ETF tracks the S&P 900 Growth Index, which measures the performance of the large and mid-capitalization growth sector of the U.S. equity market. IUSG is home to 483 stocks with key holdings in information technology, consumer discretionary and communication. iShares Core S&P U.S. Growth ETF has accumulated $19.3 billion in its asset base and charges 4 bps in annual fees. It trades in an average daily volume of 377,000 shares.

iShares Morningstar Growth ETF (ILCG Quick QuoteILCG - Free Report)  

iShares Morningstar Growth ETF tracks the Morningstar US Large-Mid Cap Broad Growth Index and holds 389 stocks in its basket. Here again, information technology is the top sector with a 45.7% share, while consumer discretionary and communication round off the next two spots. iShares Morningstar Growth ETF has amassed $2.3 million in its asset base and trades in average daily volume of 105,000 shares. It charges 4 bps in annual fees.

Vanguard Mega Cap Growth ETF (MGK Quick QuoteMGK - Free Report)  

Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 71 securities in its basket with key holdings in technology and consumer discretionary that account for double-digit exposure each. Vanguard Mega Cap Growth ETF charges 7 basis points in annual fees and trades in a good volume of around 400,000 shares a day on average. The fund has AUM of $22.3 billion (read: ETFs to Tap Apple's Potential AI-Based Growth).