Value vs. Growth, is a classic battle that has been waged since the early days of stock investing. These two factors generally swing separately from each other, and investors try to position themselves in what they believe will outperform. Each factor has its own investment proposition that investors may prefer based on their beliefs or the market backdrop.

What is the Difference Between Value and Growth?

As mentioned, value and growth are factors, and also an investment preference. 

Value investing is essentially trying to find undervalued securities. Some distinguishing factors of value investments include:

• Low Price-to-Earnings multiple
• Low Price-to-Book multiple
• Low Enterprise Value-to-EBITDA multiple
• High Dividend Yield

Growth investing is trying to find securities that are on an upward trajectory. Some distinguishing factors of growth investments include:

• High Revenue Growth
• High EBITDA Growth
• High Net Income Growth

There are numerous ETFs that allow investors to gain exposure to either Value or Growth investments. Generally, the ETFs will screen companies for the above metrics in order to add a Value or Growth tilt to the fund.

Value vs. Growth So Far in 2022

Post-2008, Growth has largely outperformed Value due to low-interest rates and relatively stable economic conditions. However, post-2020 and the Covid-19 pandemic, recessionary fears and inflation have gripped the markets leading to an outperformance of Value.

Thus far in 2022, XCV (iShares Canadian Value Index ETF), which invests in Canadian Value securities by replicating the Dow Jones Canada Select Value Index, has returned +3.5% YTD, +13.6% in the last 12 months, and +45.1% in the past three years.

Conversely, XCG (iShares Canadian Growth Index ETF), which invests in Canadian Growth securities by replicating the Dow Jones Canada Select Growth Index, has returned -8.3% YTD, -7.4% in the last 12 months, and +23.0% in the past three years. 

What Will Outperform in the Future?

Whether Growth or Value will outperform will depend on the general market dynamics going forward. It is very difficult to predict what may happen in the future, but investors may need to discern general future economic conditions to determine whether Growth or Value will outperform.

It is likely that if we continue to experience inflationary pressures, rising interest rates, and slowing economic growth that Value stocks will outperform. This is because Value stocks are usually from more stable companies that can continue to generate free cash flow even in recessionary periods. For example, XCV largely holds Canadian bank stocks and Commodity-based companies. These are companies that are relative beneficiaries of rising interest rates and higher inflation.

On the other side, if inflation were to return to normalized levels, interest rates were to decline, and economic growth were to accelerate, it would be more likely that Growth stocks would outperform. A key thing to keep in mind for growth stocks is that the prevailing interest rate will have an outsized impact on their valuations. This is because growth stocks have higher expected cash flows that are further in the future. When these future cash flows are discounted back at a higher interest, they are impacted to a greater degree than companies that generate more cash flow in the immediate future.

Data for this article is as of August 23, 2022.

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.