Growth vs. Value Investing: Key Differences and Strategies
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Growth vs. Value Investing: Key Differences & Investing Strategies
Among the various investment approaches available, growth and value investing stand out due to their distinct methodologies and the different types of opportunities they target. Understanding these investment styles is essential for investors to align their investment decisions with their financial goals and risk tolerance. This guide aims to demystify the differences between growth and value investing and to help you determine which strategy might be better suited to your investment objectives.
The Basics Behind Growth & Value Investing
There are fundamental differences that distinguish value stocks from growth stocks. In the following sections, we explore the differences between the two styles to help investors better understand how both might fit into their broader portfolio allocation.
What is Growth Investing?
Growth investing focuses on acquiring stocks of companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics like price-to-earnings ratios. Investors who adopt this strategy anticipate earnings growth that will eventually justify the higher price. Notable examples of growth stocks include technology companies like Amazon and Google, which have historically provided substantial returns due to their disruptive innovations and market dominance.
What is Value Investing?
Value investing involves picking stocks that appear underpriced relative to their intrinsic value, which is determined through fundamental analysis. Value investors seek stocks that are undervalued by the market and thus expected to provide superior returns when the market corrects the mispricing. Value stocks are often mature and stable companies that pay regular dividends, making them attractive to lower-risk value investors. Classic examples of value stocks include Berkshire Hathaway, which is led by Warren Buffett. It’s often cited as a quintessential value stock because of its diversified holdings in undervalued companies and its conservative management style. Investors often turn to Berkshire Hathaway as a staple in value investing portfolios due to its historical resilience and steady growth.
As one of the largest and most established banks in the United States, JPMorgan Chase is another example of a value investment due to its strong financial fundamentals, consistent dividend payments, and lower price compared to the intrinsic value of its assets and earnings potential.
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Key Differences Between Growth and Value Investing
Growth and value investing differ fundamentally in their approach to selection and assessment of stocks. Growth investors are typically less concerned with the current price of the stock relative to its fundamentals and more with the potential for significant growth in revenues and earnings. In contrast, value investors focus on obtaining stocks at a price that implies a discount to their true worth.
Performance in Market Conditions
The performance of growth and value investing can vary significantly under different market conditions. Growth stocks tend to perform well during economic expansions when investors are willing to pay premiums for higher earnings growth. Conversely, value stocks often outperform during a market downturn, as they are perceived as safer investments due to their undervaluation.
Historical Performance and Cyclicality
Historically, the success of growth and value investing has been cyclical. There have been periods when growth stocks have significantly outperformed value stocks and vice versa. This cyclical nature suggests that economic, geopolitical, and sector-specific factors can impact the performance of each strategy differently.
The table below provides a general overview of how value and growth stocks differ across several key dimensions:
| Characteristic | Value Stocks | Growth Stocks |
| Price Metrics | Typically have lower price-to-earnings ratios. | Usually have higher price-to-earnings ratios. |
| Market Perception | Seen as underpriced compared to their intrinsic value. | Viewed as more richly priced based on current earnings. |
| Dividends | Often pay higher dividends. | May pay little to no dividends, reinvesting profits into growth. |
| Risk | Perceived as lower risk due to undervaluation, and tendency to be in more mature business stages with more stable earnings. | Considered higher risk due to high valuations and expectations. |
| Investment Appeal | Attractive during economic downturns or market corrections. | Favored in bullish or rapidly growing economic environments. |
| Company Characteristics | Mature companies with stable earnings. | Young or rapidly expanding companies with high growth rates. |
| Earnings Growth | Slow to moderate earnings growth. | Rapid earnings growth. |
Factors to Consider When Choosing Between Value or Growth Stocks
Investors should consider their risk profile, investment goals, and the current market outlook when choosing between growth and value stocks. For instance, those with a higher risk tolerance may prefer the potentially higher returns of growth stocks, while more conservative investors may opt for the perceived safety of value stocks.
The Moat Approach to Value and Growth Investing
With the launch of the VanEck Morningstar Wide Moat Growth (MGRO) and VanEck Morningstar Wide Moat Value (MVAL) ETFs, Morningstar’s proven strategy of identifying quality companies trading at attractive valuations is now available for investors seeking targeted growth and value exposure.
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IMPORTANT DISCLOSURES
Amazon.com Inc is 4.96 of MGRO net assets as of 5/21/24.
Alphabet Inc (Google) is 3.58 of MGRO net assets as of 5/21/24.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
Index returns are not representative of fund returns. Investors cannot invest directly in the Index.
An investment in the VanEck Morningstar Wide Moat Value ETF (MVAL) may be subject to risks which include, among others, risks related to investing in equity securities, value style investing, financials sector, health care sector, industrials sector, large- and medium-capitalization companies, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s value strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the value companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.
An investment in the VanEck Morningstar Wide Moat Growth ETF (MGRO) may be subject to risks which include, among others, risks related to investing in equity securities, growth style investing, consumer discretionary sector, industrials sector, financials sector, large- and medium-capitalization companies, health care sector, information technology sector, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risk, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s growth strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the growth companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck ETFs carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
IMPORTANT DISCLOSURES
Amazon.com Inc is 4.96 of MGRO net assets as of 5/21/24.
Alphabet Inc (Google) is 3.58 of MGRO net assets as of 5/21/24.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
Index returns are not representative of fund returns. Investors cannot invest directly in the Index.
An investment in the VanEck Morningstar Wide Moat Value ETF (MVAL) may be subject to risks which include, among others, risks related to investing in equity securities, value style investing, financials sector, health care sector, industrials sector, large- and medium-capitalization companies, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s value strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the value companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.
An investment in the VanEck Morningstar Wide Moat Growth ETF (MGRO) may be subject to risks which include, among others, risks related to investing in equity securities, growth style investing, consumer discretionary sector, industrials sector, financials sector, large- and medium-capitalization companies, health care sector, information technology sector, market, operational, index tracking, authorized participant concentration, new fund, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risk, all of which may adversely affect the Fund. Large- and medium-capitalization companies may be subject to elevated risks. The Fund’s growth strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole. Furthermore, the growth companies identified by the Index provider may not operate as expected, and there is no guarantee that the index provider’s proprietary valuation model will perform as intended.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck ETFs carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.