Growth and value are basic categories in stock investing. They are so widely used that you might assume that they mean something specific.
To an extent, they do. Growth stocks promise to deliver a lot of earnings in the future but often deliver less than other stocks right now. Value stocks are priced well below what their advocates consider to be their real worth. They aren’t usually trendy.
But beyond those broad concepts, watch out. If you look under the hood, you will find that what’s called growth or value in leading stock indexes can be wildly different, and can change year by year.
The markets have undergone major shifts since the start of the pandemic, with stocks falling in and out of favor as inflation, rising interest rates, and wars in the Middle East and Eastern Europe jolted asset prices with remarkable rapidity.
Making bets on a particular style or sector is a risky undertaking in a time like this, especially if you don’t know what stocks are in your fund. At the very least, it’s critical that you understand what you’re buying.
Shifting Definitions
As I reported last year, S&P Dow Jones Indices, an influential market analysis firm, made some startling moves in its growth and value indexes. Basing its decision entirely on the hard judgments of its mathematical model, S&P included fossil-fuel energy companies like Exxon Mobil and Chevron — more frequently thought of as value stocks — in its growth indexes for 2023.
At the same time, it concluded that technology companies like 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 — making fossil-fuel companies look for a time like fast-growing stocks, despite constraints imposed by global warming.
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, director of U.S. equities for S&P Dow Jones Indices, said in an interview. “Those changes are just what happened, given the methodology.”
Then, in 2024, S&P Dow Jones Indices largely reversed itself, moving fossil-fuel companies back to its value index and tech stocks back to growth. It did so because the market in 2023 had shifted closer to traditional patterns — with an artificial intelligence boom propelling tech companies and falling energy prices blunting the appeal of fossil-fuel company stocks, at least for a while.
In an email, Mr. Preston detailed some of the changes made in his firm’s growth and value indexes at the end of 2023. Nearly one-third of the stocks in the S&P 500 value index shifted, the most since 2009, and turnover in its S&P 500 growth index was nearly as great.
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 declined 10.5 points to 8.3 percent. S&P shifted Microsoft, Amazon and Meta 100 percent to growth, while moving Exxon and Chevron fully to value.
If you hadn’t carefully examined funds that are based on the S&P indexes, you would not have known that the profile of your funds had substantially changed.
The Consequences
When the S&P 500 started to rise last autumn, giant high-growth tech stocks were among the leaders. Suppose that instead of owning the entire S&P 500 through an index fund, you wanted to hold only high-tech growth stocks. You could have gone to the trouble of buying individual shares. But a less time-consuming way of capturing the market’s rise would have been to buy an index fund that focused on big growth stocks.
Alas, it wasn’t that simple. Vanguard is an index fund leader, and it offers three large-capitalization index funds with a growth label: Vanguard Growth, Vanguard Russell 1000 Growth and Vanguard S&P 500 Growth. All had different returns, mainly because they tracked different indexes and contained different stocks.
Vanguard Growth is the biggest of the three, and it 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 Vanguard branded fund,” said Michael W. Nolan, chief spokesman for investments at Vanguard. It doesn’t veer much year to year in its definitions, nor does its sister fund, Vanguard Value.
The value side at Vanguard is parallel to 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 flagships for these investing styles. It offers other growth and value index funds because some advisers prefer them, Mr. Nolan said.
The Russell 1000 funds are offshoots of the Russell 1000 stock index. The composition of its value and growth indexes has been much more stable than S&P’s, largely because it doesn’t include price momentum as a factor, Catherine Yoshimoto, director of product management at FTSE Russell, said in an interview.
IShares and other index fund providers have similar funds, tracking a range of growth and value indexes.
A Simpler Way
I view the entire effort of selecting growth and value funds, and making bets that one investing style will outperform another, as questionable at best. Even if you pick the right overall approach in a given moment, the fickle market can shift 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 the entire stock and bond markets without trying to pick stocks or investing styles.
Vanguard, iShares, State Street, Fidelity, Schwab and a host of other companies offer broad low-cost funds. Vanguard pioneered this plain-vanilla, total-market approach with index funds with clear labels, like Vanguard Total Stock Market, Vanguard Total Bond Market and Vanguard Total International Stock Market. They are the underlying funds in the target-date series of funds that are the default option in many 401(k)s.
Investing gets much trickier when you deviate from this straightforward approach and start slicing up the markets, even in what may seem to be the simplest and most time-honored ways.
Growth investing and value investing both have long and distinguished histories. I studied value investing at Columbia Business School, where it has had a home for 100 years. Benjamin Graham, a pioneer in value investing, taught there. But practicing its precepts requires time, discipline and talent. You need to look company by company, stock by stock, bond by bond, carefully and laboriously.
Growth investing has eminent forebears, too. Peter Lynch, who ran Fidelity’s Magellan fund with 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.
Masters of these disciplines have managed to outperform the stock market — at least some of the time. But most people don’t have the time or inclination, to say nothing of the knowledge or skill, to beat the market for long.
That’s why index funds that capture the entire market make sense. Slicing the market into categories with index funds is a form of active investing. It may work some of the time, but it can backfire on you, especially if you don’t know what your fund contains.
Instead, keep it simple, and invest as broadly and as cheaply as possible. If you veer from those principles, you had better be prepared to do your homework.
Source Agencies
