As 2024 winds down, growth stocks have once again easily outperformed value stocks. If it seems like growth stocks usually outperform value stocks, you'd be correct when looking back over the past 10 years.
This can be seen in the returns of the Vanguard Growth ETF (VUG -1.43%) compared to the performance of the Vanguard Value ETF (VTV -0.59%). The Growth ETF tracks the CRSP US Large Cap Growth Index, which is essentially the growth side of the S&P 500, while the Value ETF looks to replicate the CRSP US Large Cap Value Index, which is basically the value side of the S&P 500.
Over the past decade, the Growth ETF has easily outpaced its Value ETF counterpart, with an average annual return of 15.6% as of the end of November. By comparison, the Value ETF has had an average annual return of nearly 10.8% over that same stretch. On a cumulative basis, that's a 326% return versus a 178% return -- a huge difference.
Meanwhile, it isn't just a couple of big years that have helped lead to the Growth ETF's outperformance. The ETF has outperformed the Value ETF in eight of the past 10 years. The only years during that stretch when the Value ETF outperformed were during the 2022 bear market, when the Growth ETF fell 33.1% and in 2016.
Which ETF will outperform in 2025?
Given the dominance of the Vanguard Growth ETF over the past decade, it would be easy to dismiss the Value ETF. However, growth and value investing tend to go through cycles.
While growth stocks have outperformed since 2008, value stocks outperformed between 2001 and 2008 following the dot-com bust. Value stocks also outperformed between 1984 and 1991 as well. Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French complied data showing that over 15-year rolling periods, value stocks outperformed growth 93% of the time between 1927 and 2019.
Next year could be a favorable environment for value stocks. They are often more cyclical in nature and can also be more sensitive to interest rates, as they tend to carry more debt. If the Federal Reserve continues to lower rates next year and the economy as a whole picks back up, it could be a very good scenario for these stocks.
Growth companies, meanwhile, have risen to be the biggest and most dominant companies in the world. Seven of the top 10 stocks in the S&P 500 are currently classified as growth stocks, and it can be argued that Broadcom, which is classified as a value stock, should also be a growth stock. Meanwhile, these top-seven growth companies are looking at a potential generational opportunity with artificial intelligence (AI) technology.
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While comparisons can certainly be made between the dot-com boom and the current AI craze, there are key differences. The big one is that AI technology is being driven by highly profitable, cash-rich tech companies that have established strong businesses outside AI in a variety of fields. The dot-com boom, meanwhile, spurred a lot of unprofitable, ultimately unsustainable businesses.
One case for value, though, is that the Vanguard Growth ETF has become too highly concentrated at the top. Apple, Nvidia, and Microsoft now make up nearly 32% of the ETF's portfolio. How these three stocks perform will largely drive the ETF's performance.
Apple could be the stock most to watch, as the company's valuation has climbed to a 42 times trailing price-to-earnings (P/E) ratio on barely any revenue growth the past few years. While the company is seeing a shift to higher gross-margin service revenue, the stock could be vulnerable if it doesn't see an AI-fueled iPhone upgrade cycle in 2025.
That said, overall, I continue to prefer the Vanguard Growth ETF in 2025. I think AI is still in its early innings, and AI software could be the next big theme. This could help power a number of growth stocks. Meanwhile, many of the top growth stocks in the Growth ETF are still attractively priced based on their expected growth in 2025. If the AI boom continues, I expect growth to once again come out on top in 2025.
