2023-06-01 21:14:51 ET
Summary
- Vanguard Value Index Fund ETF may currently be a better choice than Vanguard Growth Index Fund ETF Shares due to imbalances that may correct.
- Value stocks can outperform growth stocks in periods of economic recovery and rising interest rates, while growth stocks do better in periods of economic growth and low interest rates.
- VUG is too concentrated in a few large capitalization growth stocks, which may make VTV a more attractive option for investors.
At this moment, Vanguard Value Index Fund ETF Shares ( VTV ) may be a better choice than Vanguard Growth Index Fund ETF Shares (VUG). If you are like many people, you may find this hard to believe. Over the past ten years, VUG has significantly outperformed VTV when looking at total return (including dividends). However, when looking at the details of each investment you may see imbalances that will eventually correct.
10 Year Comparison VUG vs. VTV ( YCharts )
Can Value outperform Growth?
Absolutely, it can. Value will sometimes outshine growth, depending on market conditions. Historically, value stocks have generally done well in periods of economic recovery and when interest rates are rising, whereas growth stocks tend to do better in periods of economic growth and low interest rates. There are always exceptions to these statements. The current period being one of them. There are no guarantees, no crystal balls, and performance is always subject to a wide range of factors. It is generally recommended that investors diversify their portfolios and pick a mix of both value and growth strategies.
1979 to 2017 Value vs Growth (anchorcapital.com)
The research is evident. Whenever there has been a five-year period when growth outperformed value, value subsequently delivered superior results above growth and the S&P500 over the next subsequent five-year period. There always appears to be a flip from one style to the other.
As this graphic above shows, growth and value often flip between periods of outperformance. Sometimes growth outperforms and other times value outperforms. The shaded areas above show when value has outperformed growth.
Dartmouth University took six hypothetical portfolios and compared their returns by capturing data from a broader time range, from 1928 to 2017. Value outperformed growth over that long-haul period. As an investor, you may know that data and facts can be cherry-picked. During this long time period, there will be decades of data that show growth outpacing value.
Value vs Growth 1928 to 2017 (anchorcapital.com)
So, the main takeaway is that some periods of time value will outperform growth and even during long periods, you can find data sets that show value outperforming significantly.
Some Experts Agree
According to famed American investor Seth Klarman, value investing is a better approach than growth investing. In his book "Margin of Safety," Klarman argues that value investing centers on the financial strength of a company combined with its potential for future profitability. In contrast, growth investing is focused on buying companies that show promise for future growth but can also be highly risky, mainly because financial strength isn’t always a factor.
Klarman believes that value investing provides investors with a higher margin of safety by purchasing undervalued equities of companies with consistent profits and predictable cash flow. He asserts that these firms are less likely to experience substantial drops in their stock price during market declines. Conversely, growth investing involves buying shares in firms whose prospects are largely unpredictable, untested, and unknown.
To make money in growth investing, Klarman says, an investor must accurately predict the future market trends and choose the firms that will be successful. This methodology is fraught with risk and can result in significant failures if the investor is wrong about the firm or market trends. In contrast, value investing involves buying firms that are already valuable, which means that there is less speculation involved.
In summary, Klarman thinks that value investing gives investors better safety, income, and the possibility for growth. That's why he favors this method to growth investing, which is focused on the speculative potential of a company.
VUG Concentrated Holdings
The Vanguard Growth Index Fund ETF Shares is known for its emphasis on large capitalization growth stocks. However, its portfolio is too concentrated in a few large equities, which may pose significant risks to investors. Here are the top 3 holdings, according to Seeking Alpha data.
VUG Top 3 Holdings (SeekingAlpha.com)
VUG holds a sizable portion of its assets in just a few stocks. Apple, Microsoft, and Amazon account for more than 30% of the ETF’s total holdings. This means that the performance of these stocks very heavily impacts the general performance of the ETF, leaving investors at risk to market instability associated with these companies if growth sputters or the economy sours.
VUG Holdings Chart ( Seeking Alpha Data )
The extremely focused portfolio may lead to a lack of growth opportunities for the ETF. By investing primarily in a few large-cap firms, the fund may not be able to capture potential growth opportunities in other sectors of the market, or even among smaller firms. For instance, Apple may eventually exhaust their potential market and a new upstart, or firm like Samsung could come out with a superior product that captures market share faster. This could impact the fund's capability to achieve its long-term growth objective, but significant business changes could also cause a loss in value.
VTV is More Diversified
If you contrast the Vanguard Growth Index Fund holdings with the Vanguard Value Index Fund ETF Shares holdings, then you will see a big difference. VTV is a well-diversified investing choice as it tracks the performance of the CRSP US Large Cap Value Index, which includes equities from various sectors. The CRSP US Large Cap Value Index is comprised of firms from the largest US companies with equity valuations that fall into a value category. This includes financials, healthcare, industrials, and energy companies. The ETF invests in over 300 large capitalization value-oriented equities, which means it diversifies exposure across multiple sectors and equities, helping to minimize overall risk.
The largest firm in the ETF is Warren Buffett’s well-known Berkshire Hathaway ( BRK.A ) at 3.5% and the top ten holdings amount to about 22% of the total holdings. Each of these companies has over a $240 billion market capitalization. These are substantial companies, but more importantly, no single company has an outsized portion of the overall fund.
VTV Holdings Chart ( Seeking Alpha Data )
A visual comparison like the one above makes this clearer. No single stock could substantially impact the overall return of this ETF.
Dividends
Vanguard Value Index Fund ETF Shares has a more attractive dividend than Vanguard Growth Index Fund ETF Shares for quite a few reasons. The current yield on VTV is 2.64% and on VUG is only 0.61%. Primarily, VTV's portfolio is invested in dividend-paying equities of proven firms with stable profits and cash flow, making its dividend yield higher than VUG's. Furthermore, VTV's approach focuses on corporations with low price-to-earnings and price-to-book ratios, which usually implies undervalued stocks that may offer higher dividend yields.
In contrast, VUG's focus is on the equities of corporations with high growth potential but consequently low dividend payouts. These firms reinvest earnings into their businesses for growth and development, which reduces the overall dividend yield of VUG's portfolio. Comparatively, VTV has a history of paying out steady and consistent dividends, making it desirable to investors looking for long-term income streams.
Vanguard Value Index Fund ETF is a wonderful choice for investors searching for high dividend growth due to its strong history. The fund has regularly increased dividends per share from $1.69 in 2013 to $3.56 most recently, displaying an exciting growth of 110%. The biggest driver of this growth is the fund's focus on high-quality value equities with strong fundamentals, cash flows, and decent earnings growth potential. This strategy has resulted in higher odds of a future sustainable dividend growth.
Expenses
Another thing contributing to the Vanguard Value Index Fund ETF's exceptional performance is the fund's low expense ratio. The ETF's expense ratio is only 0.04%, significantly less than the average mutual fund or actively managed ETF. Low expenses mean less money taken from investor’s accounts, which overall erode returns.
Compound Growth
The long-term growth of Vanguard Value Index Fund ETF reflects the performance of the stocks held in the underlying index over time. Over the past decade, the ETF has returned an average of more than 10% each year, making it an appealing option for many long-term investors.
Assuming a 10% annual fixed interest rate, the investment returns for an initial principle of $10,000 over a ten-year period can be calculated using the compound interest formula. At the end of the first year, the investment will be worth $11,000. Over the next nine years, that $11,000 will grow to about $25,937, thanks to the power of compounding. Overall, the investment will have earned a total return of $15,937.
Compound Growth of $10,000 (Original)
Conclusion
The Vanguard Value Index Fund ETF's underlying index, the CRSP US Large Capitalization Value Index, is well-diversified and includes a broad mix of equities across different sectors and industries. The index is designed to capture the performance of undervalued large-capitalization stocks, often cash cows, which have historically provided higher dividends and good potential for capital appreciation through earnings growth. This diversified strategy helps to reduce investment risk while also boosting the potential for dividend and capital growth.
Lastly, Vanguard Value Index Fund ETF has a long track record of providing stable capital returns and consistent dividend growth each year, which appeals to many investors seeking a consistent investment. The ETF's strong performance can be attributed to a combination of factors, ranging from its low expenses, diversified approach, tax-efficient structure, and proven value-investing investment strategy.
For further details see:
VTV Poised To Outperform VUG