Growth and value are basic categories in stock investing. They are used so widely that one could assume they mean something specific.
To some extent, they do. Growth stocks promise to generate a lot of profits in the future, but they often generate less than other stocks right now. Value stocks are priced well below what their proponents consider their true value. They are not usually in fashion.
But beyond those broad concepts, be careful. If you look under the hood, you will find that what is called growth or value in the major stock indices can be wildly different and can change year after year.
Markets have seen major swings since the start of the pandemic, with stocks falling and losing popularity as inflation, rising interest rates and wars in the Middle East and Eastern Europe shook asset prices noticeably. speed.
Placing bets on a particular style or sector is a risky endeavor at a time like this, especially if you don’t know what stocks are in your fund. At the very least, it is essential that you understand what you are purchasing.
Changing definitions
As I reported last year, S&P Dow Jones Indices, an influential market analysis firm, made some surprising moves in its growth and value indices. Basing its decision entirely on the harsh judgments of its mathematical model, S&P included fossil fuel energy companies like Exxon Mobil and Chevron – most often considered value stocks – in its 2023 growth indices.
At the same time, he concluded that technology companies such as Alphabet (Google), Amazon, Meta (Facebook) and Microsoft were no longer “pure growth” stocks.
These changes reflected the market turmoil of 2022. High-growth tech stocks fell in sales and share price, while energy prices soared after Russia invaded Ukraine, causing fossil fuel companies They seemed for a moment to be rapidly growing stocks, despite the limitations imposed by the global crisis. heating.
Unlike other index providers, S&P Dow Jones Indices includes price momentum as an important factor in distinguishing between growth and value. “We publish our methodology transparently on our website,” Hamish Preston, head of U.S. equities at S&P Dow Jones Indices, said in an interview. “Those changes are exactly what happened, given the methodology.”
Then in 2024, the S&P Dow Jones indices largely reversed, sending fossil fuel companies back to their value index and tech stocks back to their growth index. It did so because by 2023 the market had moved closer to traditional patterns: a boom in artificial intelligence boosted technology companies and falling energy prices weakened the attractiveness of stocks of fossil fuel companies, at least for a time.
In an email, Preston detailed some of the changes made to his company’s value and growth indices at the end of 2023. Nearly a third of the stocks in the S&P 500 value index changed, the most since 2009, and the turnover in its The growth rate of the S&P 500 was almost as good.
The S&P 500 Growth’s exposure to information technology stocks increased 9.4 percentage points to 47.2 percent. At the same time, the S&P 500 Value’s exposure to the sector decreased 10.5 points to 8.3 percent. S&P took Microsoft, Amazon and Meta 100 percent into growth, while Exxon and Chevron went completely into value.
If you hadn’t carefully examined funds that are based on the S&P indices, you wouldn’t have known that the profile of your funds had changed substantially.
The consequences
When the S&P 500 started rising last fall, giant high-growth tech stocks were among the leaders. Let’s say that instead of owning the entire S&P 500 through an index fund, you wanted to own only high-tech growth stocks. You could have gone to the trouble of buying individual stocks. But a less slow way to capture the market’s rise would have been to buy an index fund that focused on high-growth stocks.
Unfortunately, it wasn’t that simple. Vanguard is a leader in index funds, offering three growth-labeled large-cap index funds: Vanguard Growth, Vanguard Russell 1000 Growth, and Vanguard S&P 500 Growth. They all had different returns, mainly because they tracked different indices and contained different stocks.
Vanguard Growth is the largest of the three and has the lowest cost, 0.04 percent. It tracks the CRSP US Large Cap Growth Index, which is run by an academic entity, the Center for Research in Security Prices, an affiliate of the University of Chicago.
“That’s the core of the Vanguard brand,” said Michael W. Nolan, Vanguard’s chief investment spokesman. It does not vary much year after year in its definitions, nor does its sister fund, Vanguard Value.
The value side at Vanguard parallels growth. There are three funds: the Vanguard Value fund, as well as Vanguard Russell 1000 Value and Vanguard S&P 500 Value. Vanguard Value and Growth are the company’s flagship products for these investment styles. It offers other growth and value index funds because some advisors prefer them, Nolan said.
Russell 1000 funds are branches of the Russell 1000 stock index. The composition of its value and growth indices has been much more stable than S&P’s, largely because it does not include price momentum as a factor, Catherine said in an interview. Yoshimoto, director of product management at FTSE Russell.
IShares and other index fund providers have similar funds, which track a variety of growth and value indices.
A simpler way
I think the whole effort of selecting growth and value funds, and making bets that one investment style will outperform another, is questionable at best. Even if the correct general approach is chosen at any given time, the fickle market can change at any time. Add uncertainty about what your fund may contain and you’re leaving a lot to chance.
You may be better off as an index fund investor if you forget about growth and value distinctions and track all stock and bond markets without trying to pick stocks or investment styles.
Vanguard, iShares, State Street, Fidelity, Schwab and many other companies offer extensive low-cost funds. Vanguard pioneered this simple, total market approach with clearly labeled index funds such as Vanguard Total Stock Market, Vanguard Total Bond Market, and Vanguard Total International Stock Market. They are the underlying funds in the target-date fund series that are the default option in many 401(k)s.
Investing becomes much more complicated when one deviates from this simple approach and begins to divide the markets, even in what may seem like the simplest and most traditional ways.
Both growth investing and value investing have a long and distinguished history. I studied value investing at Columbia Business School, where it has been based for 100 years. Benjamin Graham, a pioneer in value investing, taught classes there. But practicing his precepts requires time, discipline and talent. It is necessary to look at company by company, action by action, bond by bond, carefully and painstakingly.
Growth investing also has eminent ancestors. Peter Lynch, who ran Fidelity’s Magellan fund to spectacular results from 1977 to 1990, practiced a form of growth investing combined with fundamental analysis. His approach was sometimes called growth at a reasonable price.
The masters of these disciplines have managed to outperform the stock market, at least sometimes. But most people don’t have the time or inclination, let alone the knowledge or skill, to beat the market for long.
That’s why index funds that capture the entire market make sense. Dividing the market into categories with index funds is a form of active investing. It may work sometimes, but it can backfire on you, especially if you don’t know what’s in your fund.
Instead, keep it simple and invest as widely and economically as possible. If you deviate from those principles, you better be prepared to do your homework.