Curiously, Growth Stock ETFs Are Obliterating Value Counterparts

Pundits have been pounding the airwaves on the virtues of value investing. Get companies at low price-to-earnings ratios, clean balance sheets, higher-than-average dividend yields and lots of free cash flow. These folks believe that you need corporations with predictable income streams and steady profits to ride out the recessionary storm.

On the flip side, far fewer analysts have been telling you to buy growth stocks; typically, these are the companies with double-digit earnings growth prospects and may have lofty goals for new products and new services. Growth stocks are not supposed to fare as well in a recession, let alone the doom-n-gloom forecasts for a worldwide depression.

Fair enough. Yet 2009 investing dollars have been flowing into growth ETFs and pushing those prices higher. Value ETFs? They've been beaten down quite a bit more. (Does that make them even bigger bargains?)

Take a look at the huge discrepancy in YTD results:

Q1 2009, Growth ETFs Versus Value ETFs
				YTD %
Russell 1000 Value Index Fund (IWD)				-17%
Russell 1000 Growth Index Fund (IWF)				-4%
Vanguard MidCap Value ETF (VOE)				-12%
Vanguard MidCap Growth ETF (VOT)				-2%
Russell 2000 Value Index Fund (IWN)				-19%
Russell 2000 Growth Index Fund (IWO)				-9%

Simply stated, growth ETFs are averaging 10 percentage points (1000 basis points) better than their value ETF counterparts. That's a tremendous difference when one considers the unlikelihood of near-term double-digit earnings growth for any segment of the economy.

If the trend lasts, it may be a sign of a restoration in faith about an eventual economic upswing. After all, growth typically leads the way in the early stages of a bull market.

Then again, what is truly typical here? Like growth, smaller companies usually lead a bull charge. Right now, however, larger is charging while smaller is limping.

Consider the entirety of the bear that began in October, 2007. After 18 months, the Russell MicroCap Index Fund (IWC) for tiny companies still lags the primary market barometer, the S&P 500 SPDR Trust (SPY).

In a state of hypothetical grace, one might suggest that small companies have more difficulty raising capital in an ongoing financial crisis. It follows that, while there may be rising consensus about economic recovery, there's still nervousness about the survivability of the smallest enterprises.

At the moment, large and mid-sized growth are the favored sons. Nevertheless, if investors believe that credit will begin to move more freely in the not-so-distant future, expect small-cap ETFs to close the gap.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[ArtfulDodger:]

Mr. Gary Gordon:

All things being equal among any two investing entities, I would always prefer the short-term under-performer---no matter, in this case, whether its value or growth stocks.

That would be true of investment advisors, too, if I used them, and I don't. But I would choose one with a good record who was having a bad to down year over one that is currently hot.

Reversion to the mean is a fairly steadfast law in my book.

Thank you for the article.

Apr 01 09:01 AM

[Just Say Whoa!:]

Russell 1000 Growth Index Fund (IWF) -4%
Vanguard MidCap Growth ETF (VOT) -2%
Russell 2000 Growth Index Fund (IWO) -9%

Money Market Funds (Various) approx. +1.5%

So...which geniuses thought Growth stocks would be a better investment than money market funds for the past year?

Anyone? Anyone? Bueller?

Apr 01 03:07 PM

[Clamdigger:]

Cheap shot, Artie, unless you can predict how quickly reversion will occur (2 wks, 2 mos, 2yrs).

Gary, have you looked at Growth vs Value in other recession cycles? Also small vs large caps?

Thanks for the article.

Apr 01 03:08 PM

[Mistrofan:]

He he he. This is exactlly what proofs that the market is still too optimistic (read overbought) and has more room to go lower.

Apr 01 08:41 PM

[Alan Young:]

If a company stops growing because of the economy, how can you tell it's still a "growth" stock?

If a company loses book value because its cash flow is reduced, how can you tell it's still a "value" stock?

Inclusion in an index notwithstanding, I don't think the fundamentals are there for most of the companies in them.

Apr 01 08:53 PM