The battle of Value vs. Growth

Contrasting Value and Growth

Value and Growth are factors that have been shown by academic research to produce excess returns over the market. Beyond this, both are considered to be investment preferences.

Value investors try to find undervalued stocks. They typically screen for stocks with the following metrics:

• Low P/E multiple
• Low EV/EBITDA multiple
• Low P/B multiple
• High Dividend Yield

Growth investors on the other hand, typically look for stocks that are growing over time. They typically screen for stocks with the following metrics:

• High Rate of Revenue Growth
• High Rate of Earnings Growth
• High Rate of Free Cash Flow Growth

Who’s winning so far in 2022

From 2008, the Growth factor largely outperformed Value for the better part of a decade, likely due to low interest rates and stable economic conditions. However, today the picture is very different. Record levels of inflation, rapidly rising interest rates and recessionary fears have led to an outperformance of Value in recent months.

So far in 2022, VTV (Vanguard Value ETF) has returned -4.0% YTD, and +31.9% over the past three years.

While VUG (Vanguard Growth ETF) has returned -29.5% YTD, and +34.7.0% in the past three years.

While Growth has sorely underperformed thus far in 2022, over the past three years it still has beaten Value.  

Who will win in the future?

Whether Value or Growth will end up outperforming in the future is largely dependent on market conditions going forward. However, it is clearly very difficult to predict what may happen in the future.

In general, high economic uncertainty and recessionary fears, along with rising interest rates should lead to an outperformance of Value stocks.

Conversely, if inflation were to return to normalized levels and economic growth were to resume and interest rates were to decline, that would likely lead to an outperformance of Growth stocks.

As mentioned, it is difficult to predict what may happen. Therefore, it may be prudent to allocate a portfolio toward both Value and Growth. This can be done easily through various low-cost ETFs, which can be selected using ETF Cenral’s ETF Screener.

Please note this article is for information purposes only and does not constitute investment advice.