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For example Vanguard has the Vanguard S&P 500 ETF and the Vanguard S&P 500 Growth ETF. Just looking at the returns, it looks like the growth ETF has outperformed the S&P 500 ETF:

Snapshot of average annual performance for Vanguard S&P 500 Growth ETF vs. Vanguard S&P 500 ETF

... but the funds are so young that I don't think that's a really good comparison.

Even though Vanguard passively manages the growth ETF, wouldn't the index itself still be somewhat actively managed because, somehow, S&P picks companies with "growth potential"?

Is there any evidence that growth ETF's like VOOG (or VUG, which is another one from Vanguard) actually perform better over time than a normal index, such as the S&P 500?

4

The value premium would state the opposite in fact if one looks at the work of Fama and French. The Investment Entertainment Pricing Theory (INEPT) shows a graph with the rates on small-cap/large-cap and growth/value combinations that may be of interest as well for another article noting the same research.


Index fund advisors in Figure 9-1 shows various historical returns up to 2012 that may also be useful here for those wanting more detailed data. How to Beat the Benchmark is from 1998 that could be interesting to read about index funds and beating the index in a simpler way.

  • 2
    That sounds neat, I'll have to read more about that. Vanguard also has a value etf though, so by that same argument we would expect the value etf to outperform the growth etf (but maybe not outperform the index)? – Michael A Mar 21 '14 at 19:37
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They don't, actually. Though in some time frames S&P 500 growth out performs S&P 500, it often lags. This is because "growth" doesn't refer to what happens to your account, but rather the type of stock in the index -- roughly speaking, it's the half of the S&P with the best earnings growth.

That would be great, except it's not looking for is to see if that growth is worth buying. A stock with a 20% growth rate is a great buy at a P/E of 15, but a terrible buy at P/E/ 50.

That leads to what JB King was talking about -- there's also the S&P 500 Value, which is roughly the cheapest stocks relative to earnings. Value does tend to beat the broad index over the long haul, because there's nothing like getting a good deal (note a stock can be in both the growth and value categories). This holds true with other indexes as well like the Russel 2000.

All that said, you're not going to see a huge difference between S&P 500 and S&P 500 Growth. I believe this is because the S&P 500 itself leans a bit to the growthy side.

PS: With VOOG Vanguard is tracking the S&P 500 Growth Index, which is actually a thing and not Vanguard itself filtering stocks.

  • So I know that historical performance isn't necessarily indicative of future performance, but it sounds like I might still see a difference between the value index and the standard index. Id have to see if the expense ratios are higher for the values indexes though. – Michael A May 19 '14 at 17:12
  • @MichaelA Please excuse my vanilla English, but does your 2nd para appear as you wanted? I don't understand except it's not looking for is to see if that growth is worth buying. – Greek - Area 51 Proposal Mar 16 '15 at 22:58
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You are correct that over a short term there is no guarantee that one index will out perform another index. Every index goes through periods of feat and famine. That uis why the advice is to diversify your investments.

Every index does have some small amount of management. For the parent index (the S&P 500 in this case) there is a process to divide all 500 stocks into growth and value, pure growth and pure value. This rebalancing of the 500 stocks occurs once a year.

Rebalancing

The S&P Style indices are rebalanced once a year in December. The December rebalancing helps set the broad universe and benchmark for active managers on an annual cycle consistent with active manager performance evaluation cycles. The rebalancing date is the third Friday of December, which coincides with the December quarterly share changes for the S&P Composite 1500.

Style Scores, market-capitalization weights, growth and value midpoint averages, and the Pure Weight Factors (PWFs), where applicable across the various Style indices, are reset only once a year at the December rebalancing.

Other changes to the U.S. Style indices are made on an as-needed basis, following the guidelines of the parent index. Changes in response to corporate actions and market developments can be made at any time. Constituent changes are typically announced for the parent index two-to-five days before they are scheduled to be implemented.

Please refer to the S&P U.S. Indices Methodology document for information on standard index maintenance for the S&P 500, the S&P MidCap 400,the S&P SmallCap 600 and all related indices.

As to which is better: 500, growth,value or growth and value? That depends on what you the investor is trying to do.

  • This doesnt really answer my question though. For example if I prefer growth through capital gains (share price), is there any evidence that a growth ETF provides this more than the straight index or a value ETF? I know that indexes go through rebalancing and that all indexes have some management (the growth indexes must have some way of picking stocks...) but this answer doesnt tell me anything about which perform better. If they all perform about the same thats an answer too. – Michael A Mar 24 '14 at 13:30

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