Value ETF Returns Come Alive

October 31, 2019

Are value stocks making a comeback? Are growth stocks falling out of favor?

It sure seemed that way in September, when value stocks outperformed their growth counterparts by the largest margin since October 2018.

The $52 billion Vanguard Value ETF (VTV), the largest value ETF on the market, climbed 3.5% during the month, sharply outperforming the $42 billion Vanguard Growth ETF (VUG), which rose a mere 0.3%.

It was an abrupt turn of events for the factors. Value stocks had been consistently underperforming growth stocks for years. The most surprising part about it was that the shift happened in a relatively benign month for U.S. stocks—the S&P 500 rose 1.9% in September—contrasting with prior periods of value outperformance, when the broader stock market fell sharply.

Trend Shift?

Value’s outperformance versus growth hasn’t extended into October. Month to date, through Oct. 29, VUG has returned 2.2%, just barely edging past VTV’s 2.1% gain. But there are those who argue September’s turnaround is a sign that value’s day in the sun is only just beginning.

The narrative is that value stocks (those with low valuations)have simply gotten too cheap compared with growth stocks (those with above average revenue or earnings increases).

Case in point: The price-to-earnings ratio for the S&P 500 Growth Index is 56% greater than the P/E ratio for the S&P 500 Value Index, the biggest premium since 2001. The difference is even more stark for the CRSP US Large Growth Index and the CRSP US Large Value Index, which underly VUG and VTV, respectively—a 91% premium for the growth index.

Startlingly, growth, as measured by VUG, has outperformed value, as measured by VTV, in eight of the past 10 years. In that period, VUG has returned 287.8%, compared with 209.3% for VTV. Even this year, after September’s value outperformance, VUG is handily beating VTV, with a 27.5% return versus 18.6%.

 

Premium based on P/E ratios for S&P 500 Growth Index and S&P 500 Value Index

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