Complementing value indexes are growth indexes. Growth stocks generally appear expensive relative to the overall market in terms of their current earnings, dividends, or book values. Investors buy these stocks because the companies appear to have better future prospects than the typical company. Industries represented most heavily in growth stock indexes have included technology, health care, and consumer staples.
Indexes that do not attempt to separate growth and value stocks are called blend indexes. The S&P 500, composed of large-cap stocks, is an example of a large-cap blend index. The Russell 2000 Index is a small-cap blend index that consists of 2,000 small company stocks, again without regard to growth or value characteristics.
Over the long term, large-cap value has outperformed large-cap growth. However, as is the case with small- versus large-caps, growth and value stocks have done better at different times. As a general rule, when the stock market has been weak, large-cap value stocks have fared better than large-cap growth stocks. During strong market climates, large-cap growth has generally beaten large-cap value.
Small-cap growth and value have also fared differently from one another during different periods. However, it is hard to make a generic statement that small-cap value has generally done better than small-cap growth during bear markets. Certainly, from 2000–2003, small-cap value performed well compared to the other investment styles. However, during the bear market years of 1969–1970, smallcap growth actually held up better.
It turns out that the same strategy has been successful in guiding long-term asset allocation decisions between growth and value, whether using small- or large-cap ETFs.
Read More : Growth and Value ETFs
