I get it, this may not be on the same level as IU vs. Purdue or Coke vs. Pepsi, but this debate is important for investors to consider. Even more so now as we have seen such a major difference in the performance of each category. In 2022, we saw the S&P 500 Growth ETF fall by -29.52% while the S&P 500 Value ETF fell by only -5.40%. Through June 30, 2023, that same Growth ETF has gone up by 20.48% while the Value ETF has only risen by 11.3%. We all wish we would have known to own Value last year and switch to Growth on January 1st, but without that knowledge it is hard to decide where to be.
Growth and value investments are two different investment strategies that investors can include in their portfolio based on their objectives and risk tolerance. Let’s first define what is considered a growth investment and value investment.
Growth investments are focused on companies that are expected to experience above-average growth rates in terms of revenue, earnings, or stock price. These companies typically reinvest their profits back into the business to expand and innovate. Investors who choose growth investments are looking for capital appreciation, which means they want the value of their investment to increase over time. Growth companies are often associated with industries like technology, healthcare, or consumer goods, where there is potential for rapid expansion. However, growth stocks can be more volatile and carry higher risks.
Value investments, on the other hand, are based on the idea of finding stocks or assets that are undervalued or priced lower than their intrinsic worth. Value investors look for opportunities where the market has not fully recognized the true value of a company, and they believe that the market could eventually correct this undervaluation. These investments often involve companies that are more established and may not have as high growth prospects as growth investments. Value stocks can be found in various sectors and industries, and investors who choose this strategy are typically focused on buying stocks at a discounted price relative to their fundamental value. Value investing aims to generate returns through price appreciation as the market reevaluates the stock and closes the gap between its market price and intrinsic value.
To summarize, growth investments target companies with high growth potential, while value investments focus on stocks that are considered undervalued. Growth investments aim for capital appreciation based on anticipated future growth, while value investments seek to benefit from market corrections that raise the price to its true value. Both strategies carry different risks and potential rewards, and investors may choose one or a combination of both approaches based on their investment goals and risk tolerance. I mentioned the significant difference in performance over the past 18 months, but if you look at the since inception returns of the ETFs it paints a different story. The Growth ETF averages a 6.47% average rate of return, and the Value ETF is not far behind at 6.45%.
So that settles it, right? I wish it were that simple. As it goes with IU vs. Purdue and Coke vs. Pepsi, the debate may have to carry on. At Shelton Financial Group, we think it depends upon the person choosing their investments. Said another way, we think it depends on what Matters and what we can Control. For that, there is no right or wrong answer.