Sunday, July 16, 2006

Value vs Blend vs Growth

This article briefly goes over the returns thus far this year for the three stock categories - value, blend ( containing both growth and value ) and growth stocks. While gurus like Warren Buffett have dismissed the different compartments as a sales mechanism devised by Wall Street, we will look in the below article to see if this is helpful or not.

The article argues that small value stock category is better than every other category of stock over long periods of time. At the end of the article, the money chimp article shows that small cap value does better than total stock market, small growth, large value and large growth and concludes the article with the following paragraph.

"This is a strong indication that the Small Value advantage really is statistically significant. It doesn't look like it was based on luck or noise; it looks like the result of some economic or market factor that really made Small Value better than the market. (Of course that still doesn't guarantee that the trend will continue in the future.) "

In this exercise, we will look at different ETFs to see how they have done this year.

VTV - large value category has returned 4.3% till 7/13/2006.
EFV - large value iShares MSCI EAFE Value has returned 6.68% till 7/14/2006.

Compared to this, the blend segment has the following variations.

IVV - Mimics SP500 - Year to date return is 0.12%
SPY - Has a weight of 0.04%.

Let us look at large growth stocks.

EFG - The iShares Growth stocks returned 4.52% YTD as of 7/14/2006.
QQQQ - The nasdaq 100 index fund is down -11% YTD as of 7/14/2006.

In the small value category, IWN has returned 5.19% YTD as of 7/14/2006.
In the same category, IJS has returned 3.6% YTD as of 7/14/2006.

In the small blend category, the returns are as follows.

IJR has returned 1.75% YTD as of 7/14/2006.
IWM the russel 2000 index fund has returned 1.6% as of 7/14/2006.

IWR - the Russel 2000 growth fund has returned -1.76% as of 7/14/2006.
VBK - Vanguard growth Vipers have also done poorly returning -1.51% as of 7/14/2006.

So the theory seems to be holding up well for small cap value and large cap value stocks. However, these results are not statistically significant yet as one has to wait for a period of five - ten years for the results to be statistically significant. The blend category in general doesnt seem to be doing as well as the growth or value categories. While gurus like Warren Buffett can pick and choose shares, an average investor might be better off just picking the small cap value and large cap value index funds and holding on to them for long periods of time. Of course, the time at which these index funds are bought is also going to have an effect on the net returns. While large cap value looks attractive right now, the small value may have to wait for some time before it becomes an attractive buy again.

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