Led by Nvidia, Alphabet, and Apple, the Vanguard Growth ETF (VUG 1.34%) has been a surefire investment winner for the better part of the past few years.
However, if it feels like these powerhouse stocks aren't bouncing back quite as well as they should be from their early April low, you're not imagining things. Something's different, even if it's not easy to put your finger on what's different, or why. Chalk it up to the noisy environment.
Regardless of the reason(s), if you've got an extra $1,000 -- or more -- sitting in your portfolio that you'd like to put to work, now's arguably the time to back off from growth stocks and take on more exposure to value names. The Vanguard Value ETF (VTV 1.14%) will do the trick nicely.
Here we go again... value vs. growth
There are two major stock-picking schools of thought. Some investors are willing to take bigger risks and pay higher prices for a shot at above-average returns, while others will accept lesser returns in exchange for lower risk and more certainty. Broadly speaking, the former strategy is considered "growth" investing, while the latter is "value"-oriented.
Neither approach is right or wrong. Since everyone's goals, risk tolerances, and timeframes are unique, their investing approaches should be unique as well. Indeed, plenty of investors use varying degrees of both strategies at any given time, as a means of balancing ever-changing risks with a stock's ever-evolving potential.
As an example, most of the period between 2009 and now -- and especially since early 2020 -- favored growth stocks. Interest rates were lingering at record low levels for most of that stretch, providing cheap capital to companies that could do something constructive with it. The past 15 years have also been especially bullish for organizations that can make good use of technologies like artificial intelligence, cloud computing, and mobile connectivity.
Ever since interest rates began rising during the end of the COVID-19 pandemic's height in 2022, though, most growth stocks -- and the companies behind them -- haven't been quite as impressive.
These names are far from being doomed. It's difficult to see the effect of higher interest rates and a lethargic economy, especially when technology is racing ahead at an incredible speed while politics has evolved (or perhaps devolved) into a noisy contest, rather than a cooperative matter.
A shift does seem to be brewing, though. As is so often the case once a bull market is fully matured, major growth opportunities are starting to thin out. Inflation and interest rates are seemingly leveling off as well, setting the stage for value stocks to rekindle the strength and leadership they quietly started demonstrating in the latter half of last year.
A lot of analysts are saying so
That's not just a sequence-based or timing-minded assumption. Although growth stocks still have plenty of fans and supporters, based on their deep dive into the data, several analysts are now encouraging investors to begin making a strategic shift toward value stocks.
Morningstar's chief U.S. market strategist David Sekera is one of these analysts. Last month, he suggested that value stocks were still undervalued by double digits, despite a slight recovery effort shortly before then. Based on data from investment management outfit ClearBridge Investment and FactSet, Franklin-Templeton portfolio manager Sam Peters noted last month that as of the end of last year, the U.S. stock market's value/growth valuation ratio had reached a 40-year low. That sets the stage for a cyclical reversal.
NYSEMKT: VTV
Key Data Points
David Levine, associate portfolio manager of Neuberger Berman's large-cap value fund, also pointed out last month: "If you look at price-to-book, price-to-sales, the spread between growth and value are at a 30-year high. If you look at P/E, the only other time that spread has been wider is the dot-com bubble." He added: "You're seeing a little bit of a hint that we could see a normalization of valuations. As you see that, I think that's the beginnings of the drivers for value to outperform over the next few years."
At the same time, Wellington Management's Nanette Abuhoff and Karoline Klimova suggest lingering inflation and subsequently lingering above-norm interest rates are "in favor of value over the next three to five years." That's an awful lot of agreement on a matter that isn't particularly popular among investors at this time. Most people still want growth stocks to soar, so much so that they're shrugging off the reality of the current economic situation.
"You have to be a little bit early"
This doesn't guarantee that value stocks will outperform growth in the near and not-so-near future, of course. It's not even a guarantee that value stocks will perform at all! All the analysts cited above acknowledge the possibility that the artificial intelligence-driven growth produced by the market's biggest technology names will simply continue to dominate. Given AI's potential to empower almost any industry, that's a credible concern.
In this instance, though, the bigger risk may still be taking a wait-and-see approach rather than diving in here and now. As Neuberger's Levine explains with his comparison of the two different approaches to stock-picking:
Growth companies have this really bright future. If you miss the first 10%, 20%, 30% of the move, it's OK. You can still buy it. Value, you're playing for 50% move or 70% move. If you miss the first 20% or 30%, might not be worth going and chasing. Value is one of those things. You have to be a little bit early.
If that doesn't feel comfortable enough for you right now, consider adding more value exposure gradually over the course of the coming few months, as capital becomes available.
While there are several great value funds to consider, the Vanguard Value ETF is arguably one of the market's top overall choices. Not only does its underlying CRSP US Large Cap Value Index offer you a very well-diversified, well-balanced mix of value stocks -- none of which make up more than 4% of its total portfolio -- the fund charges its shareholders a rock-bottom management fee of 0.04%. You'd be hard-pressed to find a more cost-effective option.
