With the vast array of exchange traded funds (ETFs) on the market, one of the most common determinants of which ETF an investors chooses is whether it is a growth- or value-oriented index. What’s the difference?
Growth ETFs hold stocks that are in growth mode, or are growing faster than the markets. Value ETFs hold stocks that are “diamonds in the rough” – in other words, they’re undervalued and are being shunned by the market, states Ron Rowland of Money and Markets.
In simple terms, all stocks and ETFs can be considered either value- or growth-oriented, or a combo style known as “blend.” For this reason, it helps to take a look at market capitalization, as well, to further define styles. Investors now have more choices: there’s value and growth as well as large-, mid- or small-cap.
What’s more is that certain categories tend to perform better at some times than at others: small-cap and growth tend to outperform in booming economies; large-cap and value tend to do better in recessionary climates. This isn’t a given, though.
Determining which one to choose is usually up to an investor’s appetite for risk, the type of exposure desired and how diversified one’s portfolio already happens to be.
The SPDR Dow Jones Large Cap Growth (NYSEArca: ELG) is a common choice for large cap growth stocks, whereas the iShares S&P Small Cap 600 (NYSEArca: IJR) is common for value oriented small-cap investors. Regardless of which way one goes, it is important to have a strategy and mind the trend lines. For more information on how to watch trend lines, check out our new book.
For more stories on strategy, visit our trend following category.
Kevin Grewal contributed to this article.