Which Vanguard ETF, whether Growth or Value, is more likely to exceed its returns by 2025?
As the year 2024 draws to a close, growth-oriented investments have once again proven their superiority over value-focused ones. This trend is consistent when reviewing the previous 10 years.
This pattern is evident in the performance of the Vanguard Growth ETF (-1.43%) and the Vanguard Value ETF (-0.59%). The Growth ETF mirrors the CRSP US Large Cap Growth Index, which represents the growth sector of the S&P 500, while the Value ETF mimics the CRSP US Large Cap Value Index, representing the value side of the S&P 500.
Over the last decade, it's clear that the Growth ETF has been the stronger performer, yielding an average annual return of 15.6% as of the end of November. In contrast, the Value ETF has reported an average annual return of approximately 10.8% during the same period. On a cumulative basis, the Growth ETF has produced a return of 326%, compared to the Value ETF's 178%.
It's not just a few standout years that have contributed to the Growth ETF's success. The Growth ETF has outperformed the Value ETF eight times throughout the past ten years. The two exceptions were the 2022 bear market, during which the Growth ETF fell 33.1%, and 2016.
Which ETF is predicted to lead in 2025?
While the superiority of the Vanguard Growth ETF over the past decade is evident, it's important not to underestimate the potential of the Value ETF. Investment strategies such as growth and value tend to alternate in effectiveness.
Value stocks performed exceptionally well between 2001 and 2008, following the dot-com bust, and between 1984 and 1991. Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French's research indicates that value stocks have surpassed growth stocks during 15-year rolling periods, 93% of the time, between 1927 and 2019.
2025 may prove to be a successful year for value stocks. They often demonstrate cyclical tendencies and are more sensitive to interest rates due to their debt-heavy nature. If the Federal Reserve reduces interest rates in 2025 and the broader economy recovers, it could provide a favorable environment for value stocks.
On the other hand, growth companies have become the major players in numerous industries globally. Seven of the top 10 companies in the S&P 500 are currently classified as growth stocks. The rise of artificial intelligence (AI) technology presents a tremendous opportunity for these businesses.
While comparisons can be drawn between the current AI craze and the dot-com boom, there are significant differences. AI technology is being driven by profitable tech companies that have established strong businesses beyond AI in various fields. In contrast, the dot-com boom gave rise to numerous unprofitable, short-lived businesses.
One argument for value stocks is that the Vanguard Growth ETF has become overly concentrated. Apple, Nvidia, and Microsoft now collectively account for nearly 32% of the ETF's portfolio. The performance of these three stocks will significantly impact the ETF's returns.
Apple's valuation has reached a sky-high 42 times its trailing price-to-earnings (P/E) ratio, despite minimal revenue growth over the past few years. However, the company's shift toward higher-margin service revenue creates potential vulnerabilities if it fails to capitalize on an AI-powered iPhone upgrade cycle in 2025.
Despite these considerations, I still favor the Vanguard Growth ETF in 2025. AI remains in its infancy, offering significant growth potential for software and related companies. This could foster numerous growth stocks, many of which are still attractively priced based on their 2025 growth projections. If the AI boom persists, growth stocks are likely to continue their dominance in 2025.
Based on the current market trends and the potential growth of artificial intelligence, I believe the Vanguard Growth ETF may continue to perform well in 2025. With numerous growth stocks still attractively priced and the significant potential of AI for software and related companies, the dominance of growth stocks might continue.
Investors should consider diversifying their portfolio, however, as investment strategies such as growth and value tend to alternate in effectiveness. Historical data shows that value stocks have surpassed growth stocks during 15-year rolling periods a majority of the time. Therefore, it's crucial to monitor market trends and adjust investment strategies accordingly.
