Hartford Large Cap Growth ETF (HFGO)

The Hartford Large Cap Growth ETF (ticker HFGO) is a straightforward equity fund that buys large, profitable companies expected to grow faster than the economy or the broader market. It is a compact expression of a time-honoured investing approach: identify the best-run, most innovative firms in the world, buy them, and wait.

The essence of growth investing

Growth investing begins with a simple observation: over long periods, the stocks of companies that grow earnings faster than average deliver higher returns to shareholders than slow-growing firms. A company that expands revenues and profits by 15 percent annually for a decade will be radically more valuable at the end than one growing 3 percent. Therefore, a portfolio of high-growth firms should outperform a portfolio of mediocre or declining businesses, holding valuation constant.

The catch, of course, is valuation. Growth stocks are priced by investors who expect that high growth to continue. If a firm is expected to grow 20 percent per year, its stock price already reflects that forecast. The investor has paid a premium — often a very high one. If growth then decelerates to 10 percent, the stock price will crash despite the company still being profitable and growing faster than most alternatives. Growth investing therefore requires a combination of analytical skill (picking firms whose growth will continue) and courage (buying expensive stocks when the crowd is euphoric about growth, and holding them when sentiment turns).

Large-cap growth — the subset of growth investing that focuses on the largest publicly traded companies — attempts to stack the odds in the investor’s favour by focusing on firms that have proven themselves. These companies have hundreds of billions in market value, strong brands, established customer bases, and the resources to invest heavily in research and development. The largest growth companies — technology giants, biotech leaders, consumer franchises — are known quantities that analysts and investors have studied exhaustively. If a large-cap growth company is growing fast, there is usually a sound reason: a real competitive advantage, a large addressable market, execution excellence, or all three.

What a large-cap growth fund holds

HFGO’s portfolio consists of publicly traded companies with market capitalizations in the tens of billions to hundreds of billions. These are typically software companies, semiconductor manufacturers, pharmaceutical innovators, e-commerce leaders, digital-media businesses, and similar firms in technology, healthcare, and consumer discretionary sectors. They are the kind of companies that appear regularly in business headlines and are held in almost every sophisticated investor’s portfolio.

The fund applies growth criteria to select its holdings: it looks for companies with above-average historical earnings growth, expectations of continued growth, strong profitability (measured by metrics like return on equity), and sustainable competitive advantages or moats. The methodology may be systematic (applying mathematical formulas to screen large-cap stocks by growth metrics) or semi-active (a portfolio manager selects stocks using both quantitative and qualitative criteria).

The holdings are weighted by market capitalisation, which is the standard for broad equity indices. This means the largest companies — Apple, Microsoft, Nvidia, Tesla, and similar mega-cap firms — carry the heaviest weight in the fund. As those companies’ stock prices move, they dominate the fund’s performance. A small change in Apple’s stock price moves the entire fund far more than a comparable percentage move in a smaller firm.

The competitive landscape

Large-cap growth ETFs are among the most crowded product categories. Virtually every asset manager offers at least one. Some are passive index-tracking funds that hold every company in a large-cap growth index, charging minimal fees. Others are actively managed and attempt to outperform an index by holding a curated subset of stocks. The difference in expense ratio can be substantial — a passive fund might charge 0.05 percent per year, while an active version could charge 0.5 percent or more.

This makes the choice clear for many investors: unless the active manager has a track record of outperforming the index by more than the fee difference, passive is the better choice. The evidence historically suggests that most active large-cap growth managers underperform their index net of fees, especially over periods longer than ten years. Passive large-cap growth ETFs have therefore captured market share, and the category has become increasingly commoditised.

Concentration and momentum

One risk that large-cap growth funds face is concentration. Because the largest growth companies often become even larger (momentum builds as success compounds), the biggest positions in a large-cap growth fund can become very large relative to the portfolio. In some years, the top three to five holdings represent a quarter or more of the portfolio. This means the fund’s returns are highly dependent on a small number of mega-cap stocks. A setback in a single technology giant can materially hurt the fund.

Additionally, large-cap growth can go through multi-year cycles of outperformance and underperformance versus other equity styles. Periods of monetary easing (low interest rates, abundant credit) tend to favour high-growth stocks, because investors will pay large multiples for growth when capital is cheap. Periods of monetary tightening (rising rates) can hurt growth stocks, because rising bond yields make paying a premium for future growth less attractive. In 2022, large-cap growth underperformed after many years of outperformance, as the Federal Reserve raised interest rates aggressively. In 2023–2024, large-cap growth rebounded sharply, especially technology stocks driven by artificial-intelligence hype.

Valuation and the risk

Large-cap growth stocks are typically priced at premium valuations: higher price-to-earnings ratios, higher price-to-sales ratios, and lower dividend yields than the broader market. This is justified when growth is genuine and sustained. But it also means that any disappointment — a company that misses growth expectations, a shift in consumer preferences, a competitive threat — can trigger sharp price corrections. Investors have paid in advance for the growth. If it does not materialise, they pay the bill.

The risks of a large-cap growth fund are therefore the risks of paying up for a story. Some of those stories will be right. Apple’s dominance, Microsoft’s transition to cloud computing, Nvidia’s AI chips — these represented genuine long-term shifts and justified the valuations investors paid. But others will not. A technology that seems revolutionary turns out to have limited application. A company’s competitive moat erodes faster than expected. A new entrant disrupts the market. The larger and more celebrated a firm becomes, the more pressure it faces to maintain growth and the harder it is to continue surprising investors on the upside.

How to think about HFGO

For a passive index-tracking version, the fund is a low-cost, liquid way to gain exposure to the largest growth-oriented companies in the world. It is suitable for long-term investors who believe that technological progress and strong-running businesses will continue to generate above-average returns. It is less suitable for short-term traders or for those who believe large-cap growth is currently overvalued.

For an actively managed version, the question is whether the manager has a consistent edge: a record of finding growth companies before the market recognises their potential, or of avoiding the growth traps that other investors fall into. If the manager’s returns net of fees match the index, the active fund is not adding value. If they consistently underperform, it is not worth the fee. Only if they outperform by a meaningful margin — say, 1-2 percentage points annually — is the active fund justified.

In either case, monitor the holdings to understand the concentration risk. If the largest five holdings represent more than 30 percent of the portfolio, the fund is making a big bet on those companies’ continued success. Check the valuation metrics (price-to-earnings, price-to-book) against the historical average and against other equity styles to understand whether the fund is expensive or cheap in historical terms. And remember that growth stocks can experience significant drawdowns during periods of rising interest rates or when investor sentiment shifts from growth to value or defensiveness.