Value stocks have underperformed growth stocks since 2006. Now that they are much cheaper than the end of last year, is now the time to start buying value stocks long term?


Over a much longer period of time, since the early 1800’s, value stocks have beaten growth stocks by 3.25% per year. But in recent history, growth stocks have beaten value. Take a value investor like Warren Buffett, he has underperformed against the S&P 500 index for the 5, 10 and 15 years ending 2020.

The chart below shows how the two Vanguard ETFs have performed against each other since 2005. There are a few things to note about this chart. Firstly, value exceeded growth during the financial crisis in 2008. As the economy continues with concerns with inflation and a possible recession, value stocks could be the choice for these turbulent times.

Secondly, value held up much better against a falling market. The Vanguard Growth ETF has fallen nearly 31% from highs in November. The Vanguard Value ETF has only fallen 11% from the same time period.

What is in store for Value stocks?

Rising interest rates could be the key factor for value to do well against the overall market.

If equities drop sharply, which could happen due to factors such as a potential recession or macro crisis, Vanguard Value ETF would most likely decline as well. It might still outperform the broader markets, however. Many of its major holdings, such as Pfizer, AbbVie, Procter & Gamble, and so on have noncyclical business models and betas in the 0.4 to 0.8 range, meaning they generally move less than the broad market. If the broad market drops, VTV would thus most likely drop as well, but potentially to a lesser degree compared to a broad market ETF such as SPY. From a risk perspective, that could be attractive to investors.

Building an all-weather portfolio is a worthwhile goal for any passive investor. There are opportunities for outperformance for investors willing to trade. However, there’s nothing wrong with simplifying your portfolio by owning a set of value ETFs that may fare better in the coming years.

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