• ETF Insights

    'Growth’ versus ‘Value’ is a Red Herring

    Martijn Rozemuller, CEO – Europe

    To borrow an English expression, the debate about whether ‘growth’ or ‘value’ stocks outperform can be as distracting as strong-smelling smoked fish.

    At last so-called ‘value’ stocks had their time in the sun in January. After lagging fashionable ‘growth’ stocks such as the big tech companies, boring banks, energy companies and others pulled ahead.

    Meanwhile, market commentators competed for the catchiest quote about the misfortunes of tech. Think of the ‘spec tech wreck’ that’s seen some of the more speculative technology stocks tumble. And the ‘Zuck shock’ that punctured Meta – formerly known as Facebook before chief executive Mark Zuckerberg staked the future on the Metaverse – sending its shares down.

    Why has this happened? In the case of tech generally, the US Federal Reserve central bank has made it clear that it will wind down its Covid-era stimulus as inflation rises. That’s prompted a change of the guard, with the stocks that do well when inflation and rates march higher leading the market, while the ‘growth’ stocks pumped up by liquidity have fallen back.

    The debate about whether growth or value outperform is longstanding. These are two fundamentally different styles of investing: growth stocks are companies with fast-growing earnings, but expensive valuations. Value stocks, meanwhile, are those deemed inexpensive relative to their earnings.

    Depending on what timespan you look at, there’s an argument for both. A Bank of America study argued that from 1926 to 2020, US value stocks had trounced growth.1More recently, though, in the last 10 years, that position has reversed. And then, in the very recent past, value has made a comeback (see chart below, courtesy of the Financial Times).2

    Russel value and Russel growth, per cent appreciation

    Growth versus Value

    Past performance is not a reliable indicator for future performance; Source: Bloomberg. Data for the period 01/2021 - 02/2022.

    Stick to the plan

    Confused? There’s no need to be. In many ways, the debate is what the English call a red herring – something that distracts from the key issue. Instead, in my opinion, investors would be wise to concentrate on buying a broad range of ETFs, rather than chasing the switches between different styles of investing.

    Indeed, when investors chase performance they buy stocks at their peaks and sell at their lows. I believe that it is better to have a plan and stick to it, investing regularly, then perhaps rebalancing your portfolio when a particular ETF has performed well by trimming that holding and reinvesting in something else that has not done so well. The result could probably be well balanced portfolio over time.

    Within the VanEck stable, you could invest across several ETFs – both general ETFs and those with leanings to either growth or value. For a general ETF, there’s the Sustainable World Equal Weight UCITS ETF that follows the 250 most liquid, highly capitalised companies globally that comply with the UN Global Principles for responsible corporate behaviour. Alternatively, you could balance value ETFs in your portfolio against growth. The Moat strategy, which tracks high quality companies, and the Developed Markets Dividend Leaders ETF, are towards the value end of the spectrum. Meanwhile, we have a series of growth ETFs focusing respectively on semiconductors, video gaming/e-sports and blockchain companies.

    Please also consider the risks. Please refer to the Prospectus and the KIID of the relevant fund, which also include further information on the risks, before making any final investment decision.

    Don’t be distracted

    As the US Federal Reserve and other central banks raise rates in the face of bubbling inflation, it seems very likely that growth stocks will falter. But there is a chance that inflation will prove temporary. Then value would fall into shadow once more.

    Far better to remember the English idiom about the ability of strong-smelling smoked fish to distract and, in my opinion, invest for the long term through a well balanced portfolio of ETFs.

    1Do value stocks really outperform growth stocks over the long run? https://www.forbes.com/advisor/investing/value-vs-growth-stocks-performance/

    2The value rotation is about confidence not maths. FT.com. January 27, 2022.

    VanEck Asset Management B.V., the management company of VanEckTM Sustainable World Equal Weight UCITS ETF (the "ETF") and VanEckTM Morningstar Developed Markets Dividend Leaders UCITS ETF (the "ETF"), sub-funds of VanEckTM ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM and tracks an equity index. The value of the ETF’s assets may fluctuate heavily as a result of the investment strategy. If the underlying index falls in value, the ETF will also lose value.

    Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com or from the Management Company.

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