What Are They?
- "Growth" and "Value" are labels applied to stocks based on valuation metrics, such as P/E (price-to-earnings), price-to-book value, or price-to-dividends. "Value stocks" are defined as those having low current or trailing P/E, price-to-book or price-to-dividends, while "growth stocks" are those that appear more expensive on current or past valuation metrics because they are expected to grow their earnings, book value or dividends faster.
- Note, however, that selecting a stock on current or trailing valuation metrics such as low P/E may not actually reflect whether the stock is good value. The best known value investors such as Warren Buffett tend to buy stocks expected to sustain and grow earnings and cash flow over time, and they therefore factor revenue and profit growth into their calculations.
- The major index providers use growth and value as a way to slice up all the stocks in an index. Most ETFs in this list therefore cover the entire stock market, with every stock appearing in the "growth" or "value" bucket. The exception is the Quant Strategy ETFs, which use rules-based quantitative analysis to select stocks within the index.
Why & How To Use Them
- Long term investors looking to build an ETF portfolio need to decide how many ETFs to use to cover US stocks. Fewer ETFs are simpler and more convenient; more ETFs are more expensive to buy and more effort to manage, but provide greater opportunity for rebalancing (see Further Reading below). The choices, from fewer to more numerous, are: (a) 1 Total Market ETF; (b) 2 ETFs covering growth and value; (c) 3 ETFs covering large cap/mid cap/small caps; (d) 6 ETFs covering large cap value, large cap growth, mid cap value, mid cap growth, small cap value and small cap growth; and (e) 7 or more ETFs dividing US stocks by sector.
- One advantage of using a growth/value split is that it allows you to over-weight value stocks in your portfolio. According to Paul Marsh, "A large body of US-based evidence shows that there has been a higher long-run return, at least over the period from 1926-2000, from investing in value stocks". Note, however, that you could also overweight value stocks by buying a Total Market ETF and then adding a smaller holding in a value ETF.
- If you're assembling a long term, diversified portfolio, don't mix underlying indexes (such as S&P and Russell) because that will lead to overlaps between the funds. Stick with all S&P, all Russell, all Wilshire or all Vanguard. For that reason, we've grouped the ETFs in the list by family.
What to Look Out For
- Growth/Value ETFs tend to have higher expense ratios than simpler market cap index ETFs, the spreads tend to be wider when you buy and sell them.
- The Morningstar series ETFs may be less liquid than other ETFs. Morningstar was relatively late to the ETF market and by the time they arrived the Morningstar series ETFs seemed redundant to many people, potentially resulting in lower liquidity and wider buy-sell spreads.
- Vanguard's ETFs have a different structure from other ETFs, and may be less tax efficient. See Further Reading below.
- For a discussion of assembling a core portfolio using ETFs, see Seeking Alpha's ETF Investment Guide.
- You can reduce the number of ETFs in your portfolio by using one of the Total Market ETFs instead of separate ETFs for growth and value stocks. That would make the portfolio easier to manage, but may also provide fewer opportunities for rebalancing. See How to Make Money By Rebalancing and Rebalancing Rules.
- The more granular the portfolio, the greater the rebalancing opportunities. If you want to get even more granular than a split into 6 ETFs covering large cap value, large cap growth, mid cap value, mid cap growth, small cap value and small cap growth, consider using Sector ETFs (see Should You Use Sector ETFs?) .
- Some people believe that growth/value and market-cap weighted indexing underperforms other strategies. More exotic alternatives to consider for a core portfolio include Broad US Dividend ETFs and Leveraged Market Cap ETFs.
- Vanguard ETFs have a different structure from those of other providers. For more discussion of this, see Herb Morgan's The Problem With Vanguard VIPERs ETFs.
- For more on Quant Strategy ETFs, see Quant Strategy Broad ETFs.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.