Growth Investing vs Value Investing: What's the Difference?

We explain growth versus value differences in strategy, risk and performance.

kent
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Research Lead
Reviewed by: Kent Thune
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Edited by: Kent Thune

Choosing between growth investing and value investing is not an either/or decision for every investor. While one investing style may be more appropriate than the other for a given investor’s goals and risk tolerance, a diverse combination of both can make sense.  

By understanding the similarities and differences between growth and value strategies, investors can make an informed decision about which is best for their needs.  

Growth Investing vs. Value Investing: The Basics 

Growth investing focuses on companies with high growth potential, while value investing looks for undervalued companies that may not be growing as quickly but have solid fundamentals and are likely to increase in value over time.  

What Is Growth Investing? 

Growth investing involves investing in companies that have high potential for future growth, even if they are currently trading at a high price relative to their current earnings or book value. The focus is on investing in companies with high earnings growth potential and high price-to-earnings (P/E) ratios, rather than looking for undervalued companies.  

The idea with growth investing is that these companies will continue to grow and increase in value, resulting in higher stock prices in the future. 

Examples of growth stocks include technology companies, biotech firms and emerging market companies. 

What Is Value Investing? 

Value investing involves investing in companies that are currently trading at a discount relative to their intrinsic value, even if they are not necessarily growing as quickly as growth companies. Value investors look for companies with low P/E ratios, low price-to-book (P/B) ratios and high dividend yields, as these factors suggest the company may be undervalued by the market.  

The goal of value investing is to find companies that are currently undervalued but have solid fundamentals and are likely to increase in value over time. 

Examples of value stocks include utility companies, consumer staples and financial institutions. 

Growth vs. Value Stocks: Performance 

Historically, growth stocks and value stocks have had different performance characteristics. For example, growth stocks tend to outperform in a bull market when investors are optimistic about the economy and corporate earnings growth. However, value stocks tend to outperform in a bear market or during periods of economic uncertainty when investors are looking for steady earnings and dividends. 

For an example of growth versus value performance, the largest growth ETF, the Vanguard Growth ETF (VUG), had gains of 40.22% in 2020 and 27.34% in 2021, when growth stocks were in favor. In contrast, the largest value ETF, Vanguard Value ETF (VTV), had much smaller gains of 2.26% in 2020 and 26.51% in 2021. However, when the subsequent bear market hit in 2022, VUG dropped 33.15%, whereas VTV only had a slight decline of 2.07%. 

It's worth noting that the performance of growth stocks and value stocks can vary widely from year to year and can depend on a variety of factors, including the overall state of the economy, interest rates and investor sentiment. In some years, growth stocks may outperform value stocks, while in other years, the opposite may be true. Therefore, it's important to have a well-diversified portfolio that includes both growth and value stocks to manage risk and maximize returns over the long term. 

Growth vs. Value Stocks: Similarities 

While growth stocks and value stocks are often discussed in opposition to each other, there are some similarities between the two types of stocks. 

  • Accessibility: Both growth and value stocks are shares of stock typically issued by publicly traded companies to raise capital. Investors can buy and sell shares of these stocks on stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. 
  • Objective: Both types of stocks can provide investors with the opportunity to generate returns on their investment through capital appreciation and/or dividend payments. 
  • Diversification: Both growth and value stocks can be part of a well-diversified investment portfolio, which can help manage risk and maximize returns over the long term. 
  • Risks: Both growth and value stocks can be influenced by external factors such as economic conditions, geopolitical events, and changes in industry trends and regulations. Thus, both types of stocks can be subject to market volatility and may experience periods of underperformance, which can result in losses for investors. 

Growth vs. Value Stocks: Differences 

There are several key differences between growth stocks and value stocks: 

  • Fundamentals: Growth stocks are companies that are expected to grow faster than the overall market, whereas value stocks are companies that are undervalued by the market, meaning their stock prices are lower than their fundamental value. 
  • Valuation: Growth stocks often have high P/E ratios, reflecting the high expectations for future earnings growth, while value stocks often have low P/E ratios, reflecting the market's pessimism about their earnings growth potential. 
  • Dividends: Growth stocks may not pay dividends or may pay low dividends because they are reinvesting earnings to fuel future growth, whereas value stocks may pay higher dividends as a way to attract investors. 
  • Sectors: Growth stocks are typically found in high-growth sectors like technology, healthcare and consumer discretionary, whereas value stocks are typically found in more mature sectors like utilities, consumer staples and financials. 
  • Volatility: Growth stocks are often characterized by high volatility and are more likely to experience sharp price swings, whereas value stocks are often more stable and may experience less volatility. 
  • Selection criteria: Growth investors often focus on the company's revenue growth, market share and industry disruption potential, while value investors focus on factors like the company's book value, dividend yield and cash flow. 

Growth vs. Value Stocks: The Risks 

Growth stocks and value stocks share some of the same risks; however, these investment types have their own unique risks for investors to keep in mind before buying shares. 

Here are some of the main risks of investing in growth stocks: 

  • Market risk: Like all stocks, growth stocks are subject to market risk. Market risk refers to the risk that the overall stock market will decline, leading to a decline in the value of growth stocks. 
  • Volatility risk: Growth stocks tend to be more volatile than other types of stocks, meaning their prices can fluctuate more rapidly and sharply in response to changes in market conditions or company-specific news. 
  • Company-specific risk: Investing in individual growth stocks involves the risk of company-specific events, such as product failures, management changes and regulatory issues, which can negatively impact the stock price. 
  • High valuation risk: Growth stocks are often priced at a premium to the broader market due to their high earnings growth potential. This means that investors may be paying a high price relative to the company's earnings and may not realize the expected return if the company's earnings growth does not materialize as expected. 
  • Sector risk: Growth stocks are often concentrated in specific sectors such as technology, healthcare or consumer discretionary. This concentration can increase the risk of losses if there is a downturn in the specific sector. 
  • Interest rate risk: Growth stocks may also be vulnerable to rising interest rates, as these companies may have high levels of debt and tend to have longer-term cash flow horizons than value stocks, making them more susceptible to the impact of rising borrowing costs. 

Some of the main risks of investing in value stocks are: 

  • Value traps: Value stocks may be undervalued for a reason, such as declining earnings or market disruption. Investors may mistakenly invest in these stocks thinking they are a good value, only to find that the company's underlying fundamentals deteriorate further, leading to a decline in the stock price. 
  • Sector risk: Value stocks tend to be concentrated in specific sectors such as energy, financials or utilities. These sectors can be cyclical and susceptible to changes in economic conditions, which can negatively impact the value of the stock. 
  • Company-specific risk: Investing in individual value stocks involves the risk of company-specific events such as management changes, product recalls or regulatory issues, which can negatively impact the stock price. 
  • Inflation risk: Inflation can erode the purchasing power of an investment's returns. Value stocks may be particularly vulnerable to inflation risk, as these companies may have lower pricing power and may struggle to maintain profitability in a high inflation environment. 

Growth Investing vs. Value Investing: Which Is Best? 

Stocks of all kinds are generally appropriate for investors with long-term horizons. However, growth and value stocks have differing profile characteristics that may make one investing style more appropriate than the other. Some investors may also choose to include both growth and value stocks in one diversified portfolio

Growth stocks may be good investments for: 

  • Young investors: Investors with a long investment horizon, such as young investors, may be better positioned to handle the higher volatility and risk associated with growth stocks. They may have more time to recover from any short-term losses and benefit from the compounding effect of long-term growth. 
  • Aggressive investors: Aggressive investors who are comfortable taking on higher levels of risk and have a high tolerance for volatility may be suited to investing in growth stocks. They may be willing to take on more risk in exchange for the potential for higher returns. 
  • Growth-oriented investors: Investors who are focused on growth and are willing to pay a premium for high-growth companies may be well-suited to investing in growth stocks. These investors may be more interested in companies with strong revenue growth potential, high levels of innovation and disruptive technologies. 
  • Investors with a diversified portfolio: Growth stocks can be an appropriate addition to a diversified portfolio that includes a mix of asset classes and investment styles, including value stocks. By adding growth stocks, investors can potentially enhance returns and improve overall portfolio diversification. 

Value stocks may be good investments for: 

  • Conservative investors: Value stocks may be more appropriate for conservative investors or retired investors who are more risk-averse and prefer to invest in companies that have a long history of stable earnings and dividends. 
  • Income-oriented investors: Value stocks may be appealing to investors who are looking for companies with higher dividend yields. Value stocks may offer more consistent and stable dividend payments than growth stocks. 
  • Value-oriented investors: Investors who are focused on buying stocks that are trading below their intrinsic value may be suited to investing in value stocks. These investors may be more interested in stocks that have low P/E ratios and other value metrics. 
  • Investors with a long-term horizon: Value stocks may be well-suited for investors with a long-term investment horizon, as these stocks may take longer to realize their true value. Investors with a long-term perspective may be more patient and willing to hold on to stocks for an extended period of time. 
  • Investors with a diversified portfolio: Value stocks can be an appropriate addition to a diversified portfolio that includes a mix of asset classes and investment styles, including growth stocks. By adding value stocks, investors can potentially enhance returns and improve overall portfolio diversification. 

Bottom Line 

Growth stocks typically have high earnings growth rates, high P/E ratios and high expectations for future growth. Value stocks typically have low P/E ratios, low P/B ratios and high dividend yields. Although there are differences between the two, it's important to note that growth and value investing are not mutually exclusive strategies, and many investors use a combination of both approaches to construct a diversified portfolio.

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.