As 2024 comes to a close, growth stocks have once again easily outperformed value stocks. If it seems like growth stocks generally outperform value stocks, you’d be right to look back at the last 10 years.
This can be seen in the returns of the Vanguard Growth ETF(NYSEMKT: VUG) compared to the performance of Vanguard Value ETF(NYSEMKT: VTV). The Growth ETF tracks the CRSP US Large Cap Growth Index, which is essentially the growth side of the S&P 500while the Value ETF seeks to replicate the CRSP US Large Cap Value index, which is basically the value side of the S&P 500.
Over the past decade, the growth ETF has easily outperformed its value ETF counterpart, with an average annual return of 15.6% as of the end of November. By comparison, the Value ETF has had an average annual return of nearly 10.8% over that same period. On a cumulative basis, that’s a 326% return versus a 178% return – a big difference.
Meanwhile, it’s not just a couple of strong years that have contributed to the growth ETF’s outperformance. The ETF has outperformed the Value ETF in eight of the last 10 years. The only years during that period that the value ETF outperformed were during the 2022 bear market, when the growth ETF fell 33.1%, and in 2016.
Given the dominance of the Vanguard Growth ETF over the past decade, it would be easy to dismiss the Value ETF. However, growth and value investing tend to go through cycles.
While growth stocks have outperformed since 2008, value stocks outperformed between 2001 and 2008 following the dot-com crash. Value stocks also outperformed between 1984 and 1991. Nobel laureate Eugene Fama and Dartmouth professor Kenneth French compiled data showing that over consecutive 15-year periods, value stocks outperformed growth 93% of the time between 1927 and 2019.
Next year could be a favorable environment for value stocks. They are often more cyclical in nature and can also be more sensitive to interest rates as they tend to have more debt. If the Federal Reserve continues to lower rates next year and the economy as a whole recovers, it could be a very good scenario for these stocks.
Meanwhile, growth companies have become the largest and most dominant companies in the world. Seven of the top 10 stocks in the S&P 500 are currently classified as growth stocks, and it can be argued that Broadcomwhich is classified as a value stock, should also be a growth stock. Meanwhile, these seven fastest-growing companies are looking at a potential generational opportunity with artificial intelligence (AI) technology.
Image source: Getty Images.
While comparisons can be made between the dot-com boom and the current AI craze, there are key differences. The most important is that AI technology is being driven by highly profitable and cash-rich technology companies that have established strong businesses outside of AI in a variety of fields. Meanwhile, the dot-com boom spurred many unprofitable and ultimately unsustainable businesses.
One argument in favor of value, however, is that the Vanguard Growth ETF has focused too much on the top. Apple, NVIDIAand microsoft They now represent almost 32% of the ETF’s portfolio. The performance of these three stocks will greatly boost the performance of the ETF.
Apple might be the stock to watch, as the company’s valuation has risen to a price-to-earnings (P/E) ratio of 42 times with barely any revenue growth in recent years. While the company is seeing a shift toward higher gross margin services revenue, the stock could be vulnerable if it doesn’t see an AI-powered iPhone refresh cycle in 2025.
That said, overall, I still prefer the Vanguard Growth ETF in 2025. I think AI is still in its infancy and AI software could be the next big thing. This could help boost a number of growth stocks. Meanwhile, many of the top growth stocks in the Growth ETF are still attractively priced based on their expected growth in 2025. If the AI boom continues, I expect growth to return to the top spot in 2025.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Microsoft, Nvidia, Vanguard Index Funds – Vanguard Growth ETF, and Vanguard Index Funds – Vanguard Value ETF. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Vanguard Growth ETF vs Vanguard Value ETF: Which ETF will outperform in 2025? was originally published by The Motley Fool
