Will Vanguard Growth Keep Crushing Its ETF Peers?

Exchange-traded fund investors are always on the lookout for funds that can generate long-term outperformance. With so many different types of ETFs to choose from, there's no shortage of ideas for investors to pursue to seek out market-beating gains. And because it's relatively easy to set up a new ETF, you can typically find plenty of funds out there addressing hot ideas that tie into the areas of the market that are doing the best at any given time.

Growth investing has been highly successful since the financial crisis, and Vanguard Growth ETF (NYSEMKT: VUG) has taken full advantage, outperforming the market over long periods of time. However, the jury is still out on whether growth stock investing will continue to generate similar returns to what it has in the recent past. In this final article on the Vanguard Growth ETF for the Voyager Portfolio, you'll find out more about the debate within the investing community and what the future could hold for the fund.

Image source: Getty Images.

The growth vs. value debate

For a long time, growth investing and value investing coexisted in harmony. Some years, growth would outperform; others, value did better. Some investors preferred the lower-volatility results that value tended to offer, while others liked the outsized returns that growth stocks generated during strong bull markets.

However, it's been a long time since value stocks pulled their weight. During the 2010s, value stocks underperformed growth stocks by an average of nearly four percentage points per year. That trend has continued in the first half of the 2020s, with growth topping value by about an 18% to 15% margin. So it's not surprising that some commentators are declaring victory for growth and calling value investing an obsolete and suboptimal strategy.

A closer look at the source of the performance difference reveals some interesting information. Researchers at WisdomTree looked at the source of total return for value and growth stocks between 2017 and 2024, a period during which growth outperformed value by 10 percentage points annually. Of that, a bit less than half of the difference came as a result of stronger increases in earnings among growth stocks. A larger portion -- 6.6 percentage points -- came from much more significant multiple expansion in the growth stock universe. Those factors combined easily outweighed the 1.4 percentage point advantage value stocks had due to their higher dividend yields.

In particular, growth stock valuations are dramatically above their historical norms. The last time that growth stocks were this highly valued on a statistical basis was in 2021, and that was followed by a massive bear market in 2022 that disproportionately weighed on growth-stock performance.

Knowing what you own

I don't expect to resolve the growth-value debate here, although I don't believe that things are different this time and instead expect growth stocks to encounter future turbulence at some point. More importantly, though, it's essential to understand what you have in your portfolio and whether it truly adds diversification.

From that angle, Vanguard Growth ETF only exacerbates the concentrations in tera-cap tech-related stocks that many ETF investors already have to deal with in their broad-based index ETFs. It does so efficiently, though, with a 0.03% annual expense ratio. So if you want more of your money in those big-name leaders, then Vanguard Growth is a reasonable way to get the job done.

For the Voyager Portfolio, Vanguard Growth ETF won't be among its holdings. I prefer a more mindful approach to looking at growth stocks, because the stocks that score well under Vanguard Growth's methodology can do so in a variety of different ways. Some of those stocks have better prospects than others. Given just how much Vanguard Growth has outperformed recently, there are likely better places for your money to take advantage of the next big investing trend.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Growth ETF. The Motley Fool recommends WisdomTree. The Motley Fool has a disclosure policy.