Growth vs. Value Stocks

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Interpretation

Which performed better in recent years, growth stocks or value stocks? Differentiating between these characteristics is a popular way to segment the US market. Value stocks can be roughly described as "bargains". These stocks are usually associated with low P/E, low P/B, low price/cash flow, and a high dividend yield. Growth stocks are the exact opposite. They are considered expensive measured by a variety of metrics. These stocks generally do not pay dividends, as the companies usually want to reinvest any earnings in order to keep growing at certain rates.
Value and growth investing are opposing strategies. A stock prized by a value investor might be considered worthless by a growth investor and vice versa. Value investors seek to profit as the price returns to its “fair value" while growth investors are looking for "winners" and focus on competitive advantages.
The ratio in the chart above divides the Russell 3000 Growth Index by the Russell 3000 Value Index. When the ratio rises, growth stocks outperform value stocks - and when it falls, value stocks outperform growth stocks. The ratio peaked in 2000, during the dot-com mania.

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The Russel Growth & Value Indices

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Interpretation

The Russel 1000 is a subset of the Russel 3000 and includes its largest 1000 companies. Therefore, it's considered a benchmark for big-cap stocks.
The Russel 2000 is also subset of the Russel 3000 and includes its smallest 2000 companies. Therefore, it's considered a benchmark for small-cap stocks.
The Russel 3000 is the broadest index and it tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities.
All indices are capitalization-weighted and they are total return indices, which include reinvested dividends. Since inception, the value indices have outperformed the growth indices.

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