As 2024 draws to a close, growth stocks have once again easily outperformed value stocks. If it seems like growth stocks tend to outperform value stocks, you’re right to look back over the past decade.
This can be seen in the returns of the Vanguard Growth ETF (NYSEMKT: VUG) compared to the performance of the Vanguard Value ETF (NYSEMKT: VTV). The Growth ETF tracks the CRSP US Large Cap Growth Index, which is essentially the growth side of the index S&P500while the Value ETF appears to replicate the CRSP US Large Cap Value Index, which is essentially the value side of the S&P 500.
Over the past decade, the Growth ETF has easily outperformed its Value ETF counterpart, with an average annual return of 15.6% at the end of November. By comparison, the Value ETF has achieved an average annual return of almost 10.8% over the same period. On a cumulative basis, that’s a 326% return versus a 178% return – a huge difference.
Meanwhile, it’s not just a few big years that have contributed to the Growth ETF’s outperformance. The ETF has outperformed the Value ETF in eight of the last ten years. The only years during that period where the Value ETF 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 often goes through cycles.
While growth stocks have outperformed since 2008, value stocks outperformed the dot-com bust between 2001 and 2008. Value stocks also performed better between 1984 and 1991. Nobel laureate Eugene Fama and Dartmouth professor Kenneth French have compiled data showing that value stocks outperformed growth 93% of the time between 1927 and 2019 over a fifteen-year period.
Next year could be a favorable environment for value stocks. They tend to be more cyclical in nature and can also be more sensitive to interest rates as they typically carry more debt. If the Federal Reserve continues to cut rates next year and the economy as a whole rebounds, this could be a very good scenario for these stocks.
Growth companies have now grown into the largest and most dominant companies in the world. Seven of the ten largest stocks in the S&P 500 are currently classified as growth stocks, and it can be argued that Broadcomthat is classified as a value stock should also be a growth stock. Meanwhile, these top seven growth companies are eyeing a potential generational opportunity artificial intelligence (AI) technology.
