Value vs Growth Investing

1. Quick definitions: value stocks vs growth stocks

There is no single universal definition, but most index providers and fund companies use similar ideas when they classify companies as “value” or “growth.”

In practice, most “value vs growth” investing is implemented using broad value ETFs and growth ETFs that follow rules from major index providers, not from manually picking individual stocks.

2. How index providers classify value vs growth

When you buy a value ETF or growth ETF, you are usually buying into a rules-based strategy defined by an index provider (for example, MSCI, FTSE, S&P). They typically:

• Start with a parent index (such as a total U.S. or global equity index).
• Score each company on value characteristics (e.g., P/E, P/B, dividend yield).
• Score each company on growth characteristics (e.g., earnings growth, revenue growth).
• Assign stocks to value, growth, or sometimes a blend of both, based on these scores.

The exact details differ from provider to provider, which is why two “value ETFs” can hold slightly different companies or have different sector weights. When comparing value vs growth funds, always look at:

• Expense ratio (MER)
• Number of holdings and diversification
• Sector and country exposure
• Index methodology summary

For definitions of key terms, see MER (Management Expense Ratio) and Tracking error.

3. Historical patterns: when value or growth tends to lead

Over long periods, both value and growth stocks have earned positive returns. But their performance leadership rotates in cycles:

• Some decades, value stocks outperform growth stocks.
• Other periods, especially strong bull markets in tech, growth stocks dominate.
• There have been multi-year stretches where one style lags badly and tests investors’ patience.

Researchers have documented a long-term “value premium” in some markets — the idea that value stocks have, on average, delivered higher returns than growth stocks over very long periods, albeit with painful stretches of underperformance. But past performance does not guarantee the future, and the premium has been less obvious in some recent decades.

The key takeaway for long-term investors is this: no one style wins every cycle, and style leadership can flip suddenly.

4. Risk and behaviour: what value vs growth feels like

Common characteristics of value-tilted portfolios

• May have more exposure to financials, industrials, energy, and other cyclical sectors.
• Can feel “boring” when hot growth names are soaring.
• Has historically experienced sharp drawdowns in recessions or crises affecting cyclical sectors.
• Often appeals to investors who are comfortable owning unpopular or out-of-favour companies.

Common characteristics of growth-tilted portfolios

• Often more concentrated in technology, communication services, healthcare and consumer discretionary.
• Can experience large price swings (higher volatility) both up and down.
• May trade at higher valuations, which amplifies sentiment and interest-rate sensitivity.
• Often appeals to investors focused on innovation and long-term earnings growth stories.

Before tilting toward value or growth, ask whether you could stick with that tilt during a 5–10 year stretch of underperformance. Style risk is not just about volatility; it’s about your ability to stay invested when your chosen style looks “wrong” for a long time.

5. Value vs growth ETFs in a simple portfolio

For most everyday investors, value vs growth investing is best approached through broad, low-cost index ETFs, not individual stock picking. A few common approaches:

Option 1: Total-market only (no deliberate value or growth tilt)

• Own a broad market ETF (or a small set of global ETFs).
• By design, you hold both value and growth companies in market-cap weights.
• Simplest to manage; fewer moving parts and fewer “tactical” decisions.

Option 2: Core market + value tilt

• Hold a total-market ETF as the core.
• Add a small allocation to a value ETF for a deliberate value tilt.
• Rebalance periodically to keep the tilt size modest and consistent.

Option 3: Split between value ETF and growth ETF

• Replace or complement a total-market ETF with a blend of value and growth ETFs.
• For example, 50% value ETF, 50% growth ETF across the same market segment.
• Requires more ongoing monitoring and rebalancing decisions.

Whether you choose a tilt at all is a personal decision. Many long-term investors are fully satisfied with a simple global index portfolio that already includes both styles.

6. Practical questions to ask before tilting value vs growth

• Time horizon: Can you tolerate a decade or more where your chosen style lags?
• Risk tolerance: Are you comfortable with the extra volatility style tilts can add?
• Complexity: Does managing additional ETFs make your portfolio harder to stick with?
• Behaviour: Will a tilt tempt you to “style hop” (chasing whatever worked recently)?
• Costs: Are you adding higher-fee funds or trading costs just to make a small tweak?

A good rule of thumb: don’t add value vs growth complexity if it makes you more likely to second-guess your plan, trade frequently, or abandon your strategy after a short period of underperformance.

7. Example: blending value and growth in a long-term plan

The example below is illustrative only, not a recommendation. It shows how a long-term investor might think about combining value and growth exposure at the level of the whole portfolio:

Age 30–50, long-term retirement goal (illustrative only):

  80% equities
    • 60% global total-market ETF
    • 10% global value ETF (value tilt)
    • 10% global small-cap ETF (size tilt)
  20% bonds
    • 20% global or domestic bond ETF

Rebalance once per year back to target weights.
    

The key idea: the asset allocation between stocks and bonds usually has a much bigger impact on long-term risk and return than the precise split between value vs growth. Any style tilt should sit on top of a sensible, diversified asset-allocation plan.

See Asset allocation (glossary) for a refresher on this idea.

8. Frequently asked questions (value vs growth for beginners)

Is value or growth investing better for long-term investors?

Over long horizons, both value and growth stocks have delivered positive real returns in many markets. Each style has enjoyed multi-year “winning streaks” and multi-year “droughts.” There is no guarantee that either style will dominate in your investing lifetime.

Many long-term investors choose:

• A simple total-market portfolio that includes both styles by design, or
• A modest value or growth tilt that they can stick with through entire cycles.

Should beginners pick individual value or growth stocks?

For most beginners, stock picking is not necessary. It adds complexity, concentration risk and emotional pressure. Value vs growth ETFs offer diversified exposure to each style using transparent rules, which is more practical for most non-professional investors.

Do I need separate value and growth ETFs?

Not necessarily. If you own a broad index fund that tracks a large part of the market, you already hold a mix of value and growth companies. Separate style funds are more about fine-tuning and tilting than about building the core of your portfolio.

What if my value or growth tilt underperforms for years?

That is exactly what you must be prepared for before you tilt. Style investing only works if you can live through long stretches of feeling “wrong.” If you know you would abandon the strategy after a few tough years, it may be better to keep your portfolio simpler.