A 30-Year Look At Value Vs Growth

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Craig Israelsen, Ph.D., creator of the 7Twelve portfolio, consultant to 7Twelve Advisors, LLC and executive-in-residence in the Financial Planning Program at Utah Valley University. 

The value versus growth struggle is a long-standing comparison of what many have seen as diametrically opposed investment approaches. As a result, you can find plenty of ETFs that take a growth tilt and just as many with a value orientation.

As shown in Figure 1, the 30-year winner from Jan. 1, 1990 to Dec. 31, 2019 was midcap value followed closely by midcap growth. In the third spot was small cap value, followed by large cap growth. The S&P 500 Index was next, then small cap growth and large cap value. The performance of U.S. bonds and cash is also provided for comparison purposes.

How are “value” and “growth” being calculated?

In the case of large cap, I calculated the 30-year “growth” return from 1990-2019 by averaging the performance of the Russell 1000 Growth Index and the Morningstar Large Growth Fund Average. 

For large cap value, the 30-year figure was the average of the Russell 1000 Value Index and the Morningstar Large Value Fund Average. Thus, the performance for large cap growth represents the marriage of index-based performance and the average performance of large cap growth funds. Same process for large cap value, as well as mid cap and small cap.

Value Story

As shown below in Figures 2 and 3, a value “premium” (where value outperforms growth) occurs in large cap about 45% of the time when investing for five years or less. Over holding periods of 10 years, a large cap value premium manifested itself 52% of the time since 1990.

When investing for 20 years, a large cap value premium occurred 100% of the time. In other words, large cap value outperformed large cap growth 100% of the time over all 11 rolling 20-year periods between 1990 and 2019.

Among midcap U.S. stocks, the value premium is more pronounced in every holding period greater than one year. And like large cap, a value premium occurred 100% of the time when the holding period was 20 years.

Interestingly, small cap demonstrated a value premium only 40% of the time over one-year holding periods—the smallest percentage among the three market cap classifications. Over rolling three-year holding periods, there was a small cap value premium 54% of the time since 1990—over five years, 58% of the time and over 10 years 62% of the time. Finally, over 20 years, small cap value outperformed small cap growth 100% of the time.

Over the 11 rolling 20-year periods since 1990, the average large cap value premium was 74 bps. Among midcaps, the average value premium was 142 bps. For small cap, the average value premium over 11 rolling 20-year periods was 211 bps—a significant margin of victory to the committed small cap value investor.

Growth Takes Over

In the years post-2008, growth has dominated value across all three “cap” categories if we focus on rolling five-year periods. Prior to that, value generally outperformed growth. So, it’s clear that growth and value have seasons of success.

Shown in Figure 5 are the three largest ETFs in each category. In the most recent five-year period (as of Sept. 30, 2020) growth has considerably outperformed value. Things can change.