When considering exchange-traded funds (ETFs) for investment, investors are often faced with the decision between growth ETFs and value ETFs. To better understand these popular investment approaches, let’s explore the characteristics and determine which option best aligns with your investment goals.
What Are Growth and Value ETFs?
Before we dive into the comparison, let’s define Growth & Value ETFs:
- Growth ETFs: These ETFs concentrate on investing in companies anticipated to experience above-average growth rates. They specifically target businesses with strong prospects for sales and earnings expansion, often including innovative technology firms or emerging market leaders.
- Value ETFs: In contrast, Value ETFs focus on stocks that appear to be undervalued based on their fundamental metrics. These ETFs typically seek out companies that may be temporarily disregarded by the market but possess solid underlying assets or growth potential.
Comparing Growth and Value ETFs
Let’s break down the key differences:
| Aspect | Growth ETFs | Value ETFs |
| Risk Level | Higher | Lower |
| Potential Returns | Higher | Moderate |
| Volatility | More volatile | Less volatile |
| Dividend Yield | Lower (earnings reinvested) | Higher |
| Market Conditions | Thrive in bull markets | Perform well in volatile markets |
| P/E Ratios | Generally higher | Generally lower |
Growth ETFs
Growth ETFs are investment vehicles that focus on growth investing, a strategy that seeks out young or small companies with high growth potential compared to their industry or the overall market. These ETFs have the potential to deliver impressive returns and outperform the respective index they track.
It is important to note that investing in growth ETFs comes with a certain level of risk, as these companies often trade at high price-to-earnings (P/E) ratios. Additionally, most growth-stock companies prefer to reinvest their earnings back into the business rather than paying out dividends to shareholders.
Some well-known growth stocks that are often included in growth ETFs are Alphabet (Google), Amazon, Tesla, and NVIDIA. Examples of popular U.S. growth ETFs include the Vanguard Growth ETF (VUG) and the iShares Russell 1000 Growth ETF (IWF).
Value ETFs
A value ETF consists of stocks that are perceived to be trading at levels below their intrinsic value, known as undervalued stocks. These stocks are typically from well-established companies with solid fundamentals. Value ETFs are considered a more conservative investment option, making them suitable for passive investors. They may perform better in volatile markets but offer less potential for growth compared to other ETFs.
One advantage of value ETFs is their tendency to issue dividends since the underlying companies generally have stable cash flows. Examples of well-known value stocks include AT&T, Procter & Gamble, General Electric, and Coca-Cola. Popular U.S. value ETFs include the Vanguard Value ETF (VTV) and the iShares Russell 1000 Value ETF.
Growth Vs Value Performance over the years
Let’s take a look at Vanguard Growth & Vanguard Value ETFs over the course of 10 years & 9 months.
Growth ETFs outperform Value ETFs throughout 10Y, while being more volatile than Value ETFs in Bear Markets.
Vanguard Growth ETF – +46% 9M
Vanguard Value ETF – +25.93% 9M
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Performance Comparison |
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| Return | VUG | VTV |
| YTD | 21.38% | 13.54% |
| 1-Year | 30.03% | 20.40% |
| 3-Year | 9.72% | 9.72% |
| 5-Year | 18.36% | 11.31% |
| 10-Year | 15.54% | 10.30% |
| Volatility | 4.76% | 2.31% |
Top Performing Growth ETFs
- Invesco QQQ ETF
- iShares S&P 500 Growth ETF
- Vanguard Growth ETF
- SPDR S&P 600 Small Cap Growth ETF
- Global X Lithium & Battery Tech ETF
Top Performing Value ETFs
- SPDR Portfolio S&P 500 Value ETF (SPYV)
- Fidelity Value Factor ETF (FVAL)
- Vanguard International High Dividend Yield ETF (VYMI)
- Vanguard Mid-Cap Value ETF (VOE)
- Invesco FTSE RAFI Developed Markets ex-U.S. ETF (PXF)
Historically, value stocks have outperformed growth stocks over the long term. However, recent years have seen growth stocks take the lead, particularly during bull markets and periods of falling interest rates. Growth ETFs in particular are more volatile than Value ETFs, offering high risk, high returns. It’s important to remember that past performance doesn’t guarantee future results.
Both growth and value ETFs have their place in a well-rounded investment strategy. By understanding the characteristics of each, you can make informed decisions that align with your financial objectives. For instance, if you’re a young investor with a high risk tolerance and a long investment horizon, you might lean more heavily towards growth ETFs. On the other hand, if you’re nearing retirement and prioritize stability and income, value ETFs might play a larger role in your portfolio.
Remember, the key to successful investing often lies in diversification and staying true to your long-term goals, regardless of short-term market fluctuations.
