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Growth Stock ETFs Continue to Outpace Value Styles


Value stocks have historically beaten growth stocks, but the outperformance has not been reflected in U.S. stock exchange traded funds that track the two styles.

Academic studs have shown that U.S. value stocks have outperformed growth stocks by an average 6% to 10%, depending on the market, since 1980, reports George Athanassakos for the Globe and Mail.

However, value and growth ETFs paint a different picture. For instance, the iShares Core U.S. Value ETF (IUSV) , which focuses on value stocks taken from the Russell 3000, has generated an average annualized return of 7.6%. Meanwhile, the iShares Core U.S. Growth ETF (IUSG) , which tracks growth stocks from the Russell 3000, has returned an average 9.5%. Year-to-date, IUSV rose 1.6% while IUSG increased 6.3%.

Researchers have long studied the relationship between value and growth investments. Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.

While value investors may pick from the cheapest of stocks and growth investors stick to the priciest group, ETFs seem to take more liberties with the valuation guide. Value stock investors may target the lowest P/E stocks to find intrinsic value, compare it with the market price of the stock and then determine if the stock is truly undervalued. However, value ETFs may not meet the value requirements of strict value investors or academics as broad value ETFs show values greater than traditional 14 P/E and 1.3 P/B ratios. For instance, IUSV shows a 17.2 price-to-earnings ratio and a 1.7 price-to-book, whereas IUSG has a 20.4 P/E and a 4.6 P/B.

Moreover, the current underperformance in value stock ETFs may be affected by investment sentiment. Specifically, investors are typically more aggressive during periods of heightened volatility and would chase popular growth stocks. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth.

However, once markets are calmer, investors may become more rational and realize that value stocks are trading at much cheaper prices.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.