Growth still reigns over value

by , 19th August 2018

Growth stocks have soared on the back of a growing economy, but as stock growth and strong returns begin to falter – with the likes of Twitter, Facebook and Netflix earnings missing targets and a few other high growth stocks coming under pressure – the debate over value or growth is mounting.

In recent years growth stocks – companies that are expected to deliver rapid growth in revenue or cash flow – have boomed. In the US, Amazon’s share price has risen 92% in the last year while, in the UK, NMC Healthcare is up nearly 70% over the same time period.

As of the end of June, assets invested in growth ETPs globally sits at $205.29m and value ETPs at $198.77m, according to data from ETFGI. The graph below shows the breakdown of assets and number of ETPs available.

Source: ETFGI

Broadening out, growth ETFs have performed much more strongly than value ones. In the past year the Vanguard Growth ETF (VUG) returned 20.4%, while the Vanguard Value ETF (VTV) returned 13.3% over the same time period. (VUG is an ETF slanted towards US growth stocks while VTV is slanted towards US value stocks.)

It’s a similar story with UK-listed ETFs that focus on US shares. The Lyxor Russell 1000 Value ETF (RSVL) returned 10.37% in the past year, while the Lyxor Russell 100 Growth ETF (RSGL) returned 25.26% over the same time (see graph below).

Source: Bloomberg 

However, market watchers are now asking whether investors are overpaying for growth stocks.  In a recent piece we asked whether large cap US equities, which have helped boost growth stocks, can continue their run.

Jefferies equity strategist Steven DeSanctis said in a note to clients in July as reported by CNBC that he believes US equities are shifting from growth to value.

“Of the five FAANG stocks that have reported, two have flopped along with a few other high growth/high momentum names and this group is coming under pressure,” he said. “We think this presents us with the catalyst to shift toward value and valuations mattering.”

Other believe FAANG stocks movement upward is likely to slow.

According to Walter Price, senior portfolio manager at Allianz Global Investors on CNBC, “It’s really hard for us to rationalise a stock that’s worth $500bn to a trillion going up another 50 or 100%. I think that would be very improbable.”

It’s a difficult sell though. Even if they do slow, there is a good outlook for growth stocks and their valuations are strong, VUG tracks the CRSP U.S. Large Cap Growth Index. It has a price to earnings (P/E) ratio of 29 and a price to book ratio (P/B) of 6.2 according to ETF.com. By comparison, VTV has a P/E ratio of 20.7 and P/B of 2.3.

A higher P/E may suggest good potential for growth or it may just mean that a stock is overpriced. Similarly, a low P/E may mean a stock has limited prospects for growth or it may mean the stock is too cheap. A low P/B can be considered undervalued and therefore a buying opportunity. A value stock would typically have low P/E and P/B. Growth stocks typically have higher P/E and P/B’s.

There is no clear cut argument on value over growth or vice versa. But what does seem to be clear is that neither growth nor value are limited to just large cap stocks and they often dip into the mid cap territory, so it’s probably worth having a bit of both.

We list below a number of growth and value ETFs on the London Stock Exchange.

ETF

 

TER 1YR RTN INDEX GROWTH

Or

VALUE         

Lyxor Russell 1000 Value ETF (RSVL) 0.19% 10.37% Russell 1000 Value Total Return V
Lyxor Russell 1000 Growth ETF (RSGL) 0.19% 25.26% Russell 1000 Value Total Return G
iShares Edge MSCI Europe Value Factor UCITS ETF (IEDL) 0.25% -7.16% (3m rtn only) MSCI Europe Enhanced Value Index V
iShares Euro Total Market Value Large UCITS ETF EUR Dist

(IDJV)

0.40% -6.08% EURO STOXX Total Market Value Large Index V
iShares Edge MSCI USA Value Factor UCITS ETF (IUVL)

 

0.20% 15.87%  MSCI USA Enhanced Value Index V
Lyxor SG Global Value Beta UCITS ETF (SGVB)

 

0.40% 5.20% SG Global Value Beta Net Total Return Index V
SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (EUSV)

 

0.30% 1.19% European small cap companies exhibiting low valuation characteristics V
SPDR MSCI Europe Value UCITS ETF (EVAL)

 

0.25% -1.05%  European equities with a higher weighting applied to securities exhibiting low valuation characteristics V
SPDR MSCI USA Small Cap Value Weighted UCITS ETF

(USSC)

0.30% 18.94% US small cap companies exhibiting low valuation characteristics V
SPDR MSCI USA Value UCITS ETF

(USVL)

0.25% 11.44% US equities with a higher weighting applied to securities exhibiting low valuation characteristics V
UBS ETF-MSCI EMU Value UCITS ETF

(UB17)

0.25% -6.61% MSCI EMU Value Index V
UBS Irl ETF Plc – Factor MSCI USA Prime Value UCITS ETF

(UC96)

0.25% 17.81% MSCI USA Prime Value Total Return Net V
UBS Irl ETF plc – MSCI USA Value UCITS ETF

(UC07)

0.20% 9.96% MSCI USA Value Index V
Vanguard Global Value Factor UCITS ETF

(VVAL)

0.22% 10.60% FTSE Developed All Cap Index and the Russell 3000 Index V
iShares Edge MSCI World Value Factor UCITS ETF

(IWVU)

0.30% -6.24% (3m rtn only) MSCI World Enhanced Value Index V
Xtrackers MSCI World Value UCITS ETF

(XDEV)

M’ment fee: 0.15%

Expense ratio: 0.25%

7.24% MSCI World Enhanced Value Index (Net Total Return) V
WisdomTree Global Quality Dividend Growth UCITS ETF

(GGRA)

0.38% 12.08% WisdomTree Global Developed Quality Dividend Growth Index G
WisdomTree Global Quality Dividend Growth UCITS ETF

(GGRW)

0.38% 12.79% WisdomTree Global Developed Quality Dividend Growth Index G
WisdomTree US Quality Dividend Growth UCITS ETF

(DGRA)

0.33% 16.33% WisdomTree US Quality Dividend Growth Index G
WisdomTree US Quality Dividend Growth UCITS ETF

(DGRW)

0.33% 16.23% WisdomTree US Quality Dividend Growth Index G