The classic tug-of-war between growth and value investing is no longer as black and white as it used to be. While value stocks are traditionally seen as the underpriced, steady performers and growth stocks as high-flying future bets, the lines have blurred—and so have the returns.
Over the last decade, growth has trounced value. The iShares Russell 1000 Growth ETF (IWF) delivered total returns of over 360%, while its value counterpart, the iShares Russell 1000 Value ETF (IWD), delivered returns of under 140%. That’s a stark contrast to historical norms: since 1927, value stocks have typically outperformed growth by about 4.4% annually.
So, what gives?
For starters, even benchmark indexes like the Russell 1000 aren’t as pure as you might think. Approximately 30% of stocks fall into both the growth and value categories. Indexes are constructed using metrics like price-to-book and price-to-earnings ratios, but classification isn’t always clear-cut, especially as sectors evolve. Tech, once a symbol of pure growth, now holds considerable weight in value indexes.
Warren Buffett famously says, “Price is what you pay, value is what you get.” But that doesn’t mean passive investors should blindly follow value indexes. In fact, the Russell 1000 Value Index may no longer reflect true value investing, and likely isn’t the best tool for finding hidden gems.
Still, value investing isn’t dead. As Dimensional Fund Advisors notes, “Paying less for future cash flows has historically led to higher returns.” While recent years have challenged that logic, mean reversion is a powerful force. Eventually, value may make a comeback.
Until then, smart investors might take a balanced approach. As Hartford Funds puts it, “The performance of growth and value stocks has been cyclical.” Riding both waves might just be the best way to stay afloat.
