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ETF Specialist

Growth Gets Better With Size

This mega-cap growth ETF offers a heavy dose of the market's most profitable companies.

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Mega-cap growth companies tend to enjoy strong profitability, sustainable competitive advantages, and of course, healthy growth. While growth stocks have historically lagged their value counterparts in nearly every market studied over long horizons, this performance gap is the smallest among mega-cap stocks. That may be because mega-cap growth stocks represent many of the market's most profitable companies. Recent studies have found that the stocks of highly profitable companies tend to outperform their less profitable counterparts with similar valuations.

With its narrow focus on mega-cap growth stocks,  iShares Russell Top 200 Growth Index (IWY) offers a higher concentration of quality companies than most of its peers. It invests in the faster-growing and more expensive half of the Russell Top 200 Index, which tracks the 200 largest U.S. companies by market cap. Although these companies tend to grow more slowly than their smaller counterparts, they also tend to be more profitable and less volatile. There is some evidence that the market does not fully appreciate the long-term persistence of high-quality firms' earnings power. As a result, there may be an opportunity for long-term investors to profit from the market's myopic focus by buying the type of quality stocks this fund holds at reasonable prices.    

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.