As 2024 comes to a close, growth stocks have once again easily outperformed value stocks. If it seems like growth stocks typically outperform value stocks, you’d be right when looking back over the past 10 years.
This can be seen in the returns Vanguard Growth ETF (NYSEMKT:VUG) compared to performance Vanguard Value ETF (NYSEMKT:VTV). The Growth ETF tracks the US Large Cap Growth Index CRSP, which is essentially the growth side of the CRSP Index Standard & Poor’s 500while the Value ETF looks to replicate the CRSP US Large Cap Value Index, which is essentially the value side of the S&P 500.
Over the past decade, growth ETFs have handily outperformed their value ETF counterparts, with an average annual return of 15.6% as of the end of November. By comparison, the value ETF generated an average annual return of about 10.8% over the same period. On a cumulative basis, that’s a 326% return versus a 178% return – a huge difference.
Meanwhile, it wasn’t just a few big years that helped drive ETF outperformance. ETFs have outperformed value ETFs in eight of the past 10 years. The only years during that period that value ETFs outperformed were during the 2022 bear market, when the growth ETF fell 33.1%, and in 2016.
Given the dominance of the Vanguard Growth ETF over the past decade, it would be easy to dismiss the Value ETF. However, growth and value investing tend to go through cycles.
While growth stocks have outperformed since 2008, value stocks have outperformed between 2001 and 2008 in the wake of the dot-com bust. Value stocks outperformed between 1984 and 1991 as well. Nobel laureate Eugene Fama and Dartmouth professor Kenneth French complied with data showing that over a 15-year period, value stocks outperformed growth by 93% between 1927 and 2019.
Next year could be a favorable environment for value stocks. They are often more cyclical in nature, and can also be more sensitive to interest rates, because they tend to carry more debt. If the Fed continues to lower interest rates next year and the economy as a whole rebounds, this could be a very good scenario for these stocks.
At the same time, growing companies rose to become the largest and most dominant companies in the world. Seven of the 10 largest stocks in the S&P 500 are currently classified as growth stocks, and it can be argued that Broadcomwhich are classified as value stocks, should also be growth stocks. Meanwhile, these top seven growth companies are looking for a potential generational opportunity Artificial Intelligence (AI) technology.
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