The Battle for Investment Supremacy: Growth vs. Value Stocks
As we approach the end of 2024, a familiar trend has emerged: growth stocks have outperformed value stocks, continuing a decade-long streak. But is this dominance set to continue, or will value stocks stage a comeback?
A Decade of Growth Supremacy
The Vanguard Growth ETF, tracking the CRSP US Large Cap Growth Index, has consistently outpaced its value counterpart, the Vanguard Value ETF, which replicates the CRSP US Large Cap Value Index. Over the past 10 years, the Growth ETF has averaged an impressive 15.6% annual return, compared to the Value ETF’s 10.8%. This translates to a cumulative return of 326% for the Growth ETF, dwarfing the Value ETF’s 178%.
Cycles of Performance
However, it’s essential to recognize that growth and value investing tend to oscillate in cycles. While growth stocks have reigned supreme since 2008, value stocks previously outperformed between 2001 and 2008, following the dot-com bust. In fact, Nobel laureate Eugene Fama and Dartmouth professor Kenneth French found that value stocks outperformed growth stocks 93% of the time over 15-year rolling periods between 1927 and 2019.
A Shift in Favor of Value?
Next year may present a favorable environment for value stocks, which tend to be more cyclical and sensitive to interest rates. If the Federal Reserve continues to lower rates and the economy picks up, value stocks could thrive.
The Rise of Growth Giants
On the other hand, growth companies have become the largest and most dominant players in the market. Seven of the top 10 S&P 500 stocks are classified as growth stocks, with artificial intelligence (AI) technology presenting a potential generational opportunity. While comparisons to the dot-com boom are inevitable, the key difference lies in the profitability and cash reserves of today’s tech giants.
Concentration Risks
One concern for growth investors is the high concentration of the Vanguard Growth ETF’s portfolio, with Apple, Nvidia, and Microsoft accounting for nearly 32% of its holdings. The performance of these three stocks will significantly impact the ETF’s overall performance.
A Case for Growth
Despite these concerns, I believe the Vanguard Growth ETF remains an attractive option for 2025. AI technology is still in its early stages, and AI software could be the next big theme, driving growth stocks forward. Many top growth stocks in the Growth ETF are still reasonably priced based on their expected growth in 2025. If the AI boom continues, I expect growth to outperform once again.
Investment Opportunities Ahead
Before investing in the Vanguard Growth ETF, consider the broader market landscape and the potential for other stocks to produce monster returns in the coming years. A well-diversified portfolio and a keen eye on emerging trends can help investors navigate the ever-changing investment landscape.
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