Growth ETF vs. value ETF: What’s the difference?

As you build your investment portfolio, you will likely come across two widely followed styles — value and growth. In many ways, the option you choose will depend on your specific needs and financial objectives.

While it might seem complex, there are exchange-traded funds (ETFs) set up to help you diversify and streamline the process.

Here’s what you need to know about these types of investments and how they might fit into your strategy.

Growth ETF investing

Growth investing is a strategy focused on finding stocks where the underlying companies are expected to grow sales and profits at an elevated rate and generate above-average returns.

Whereas value investors search for bargains and steady income, growth investors are willing to pay a premium for shares of companies that could significantly outperform in the future. Often, these names are part of industries at the forefront of innovation like technology and biotech. Because their services are nascent, they tend to be young companies with the potential to disrupt entire industries.

Some well-known growth stocks include Alphabet (GOOGL), Amazon (AMZN), Tesla (TSLA) and NVIDIA (NVDA). As these companies dominated their respective industries, their shares experienced parabolic moves, capturing massive gains for early investors.

Of course, plenty of other growth stocks have experienced rapid gains in prices, only to see their shares eventually sink as their business prospects never materialized. That’s one reason growth investing can be potentially more volatile than value investing.

By default, growth investors are typically less concerned about metrics like dividend payments, debt levels or cash on hand, as they expect growth companies to reinvest in their businesses heavily. However, as time goes on, these factors become more prevalent.

The strategy can be attractive to younger investors as they have additional time to stay with an investment through any short-term declines in price. But even for other age groups, owning a portion of growth stocks can maximize potential gains and serve as a diversification factor.

Top growth ETFs

Retail investors have access to a plethora of options targeted to growth investments across sectors and industries. Below we highlight some of the most popular. Data below is as of Oct. 10, 2023.

Vanguard Growth ETF (VUG)

VUG is one of the biggest growth ETFs with around $173 billion in assets under management. This passively managed fund selects large-cap companies with growth characteristics.

Among its top holdings, the fund invests in Apple (AAPL), Microsoft (MSFT) and Amazon. Almost all of the fund’s holdings are U.S. companies. It has an expense ratio of 0.04 percent.

iShares Russell 1000 Growth ETF (IWF)

Another popular option is IWF, which manages about $69 billion. With this fund, investors have exposure to U.S. growth companies in various market-cap sizes.

Some of its top holdings include shares of Apple, Microsoft, Amazon and  NVIDIA. It has an expense ratio of 0.19 percent.

iShares S&P 500 Growth ETF (IVW)

IVW is one of the most established growth ETFs on the market. The fund has  $34 billion in assets under management. The fund owns stocks of S&P 500 companies with certain growth characteristics such as sales growth.

About 36 percent of its investments are in technology companies. Among its top holdings, the fund owns shares of Apple, Microsoft and NVIDIA. It has an expense ratio of 0.18 percent.

Value ETF investing

Value investing is a strategy that focuses on finding undervalued stocks based on a company’s fundamentals.

When searching for buying opportunities, value investors often pay special attention to metrics like stable cash flows, earnings, dividends, and minimal debt as critical indicators. Then they use that information to gauge a company’s intrinsic value and its future earnings potential.

While conducting fundamental research, value investors also look at overall industry metrics to discover additional insights. For example, if Coca-Cola’s (KO) shares appear undervalued, they would evaluate metrics in the consumer staples sector, along with direct competitors such as PepsiCo (PEP). This type of analysis ensures an apples-to-apples comparison.

Like bargain hunting, value investors want to scoop up shares of companies they think are “cheap.” Often, they are not seeking to hit a home run. Instead, they aim to generate consistent returns, as value stocks tend to be less volatile.

Consider famed value investor Warren Buffett, whose investment philosophy relies on patience, sound analysis and never acquiring assets in business models he doesn’t understand. For Buffett, this simple investment approach has paid off. Since 1965, the company he runs, Berkshire Hathaway, has generated a compound annual gain of 20 percent, about double the return of the S&P 500 index.

Value investors like Buffett are always searching for companies with solid business models trading at a discount, and that’s what value ETFs aim to offer.

Exchange-traded funds are a low-cost option for retail investors to diversify and gain access to a wide range of investment themes such as value investing.

Through these investment vehicles, you own a basket of stocks that is managed by a professional, freeing you from having to dig through research reports, balance sheets, or conducting time-consuming analysis.

When you acquire a value ETF, a fund manager can only buy or sell securities that meet the predetermined criteria outlined in a prospectus. Such documents are available for every ETF and mutual fund. By reviewing this information before investing, you can determine whether the investment criteria, asset allocation, portfolio holdings, management fees, and other attributes align with your financial goals.

A prospectus acts as a binding contract, preventing fund managers from deviating from what they said they would do. So, if you invest in a value ETF, you can be confident that only companies with specific characteristics are included.

Top value ETFs

As the ETF market continues to grow, market participants have access to a large set of options targeted to value investors. Some of these investment strategies are broad, while others are niche and very specific. Below we highlight some of the most popular.

Vanguard Value ETF (VTV)

VTV is the most prominent value ETF with $144 billion in assets under management. This passively managed fund selects undervalued stocks in large-cap companies across industries.

Among its top holdings, the fund owns securities of Exxon Mobil (XOM),  UnitedHealth Group (UNH), and Buffett’s company Berkshire Hathaway (BRK.B). Over 99 percent of the fund’s holdings are U.S. companies. It has an expense ratio of 0.04 percent.

iShares Russell 1000 Value ETF (IWD)

Another popular option, IWD has about $48 billion in assets under management. The fund selects undervalued companies from the Russell 1,000 index, which tracks US corporations beyond large-cap cap names, including mid- and small-size enterprises.

Some of its top holdings include shares of Berkshire Hathaway, JPMorgan Chase (JPM) and Exxon Mobil (XOM). It has an expense ratio of 0.19 percent.

Vanguard Small-Cap Value ETF (VBR)

VBR offers exposure to an index of US small-cap companies across industries. The fund has about $46 billion in assets under management.

About 19 percent of its investments are in financial companies. Among its top holdings, the fund owns shares of Builders FirstSource (BLDR), Bunge (BG)and IDEX Corp (IEX). Its expense ratio stands at 0.07 percent.

Growth or value ETFs: Which are better?

Depending on your financial goals, asset allocation and risk tolerance, there are various strategies for investing in value and growth stocks. Your level of financial knowledge and engagement with your investments also plays a factor.

For most investors, passively managed ETFs are likely the best option. Intended as a buy-and-hold strategy, they provide automatic diversification and free up investors from consistently monitoring market developments.

Once you determine your financial goals and risk tolerance, you can use passively managed ETFs to invest in value and growth stocks. The key for investors is to understand how much of each strategy makes sense for their portfolio and ensure those allocations are flexible as market developments take place.

For example, you may initially decide to invest 15 percent of your portfolio in value ETFs and 10 percent in growth ETFs. As changes in the stock market happen, those weightings are likely to fluctuate. By periodically reviewing your investments, you can be sure that your holdings align with your financial objectives.

When the time comes, you can follow our guide on finding ETFs that suit your financial needs and the key features to consider.

Ultimately, value and growth stocks have a place in many investors’ portfolios. How much you decide to own in each category depends on your financial situation and the level of risk you are willing to take.

What to consider when choosing the best ETF

Expense ratio

As an ETF investor, you’ll want to pay close attention to a fund’s expense ratio, which is expressed as a percentage of the fund’s assets. Some ETFs have expense ratios close to zero, while others can be 0.5 percent or more. A ratio of 0.30 percent means you’ll pay $30 annually for every $10,000 you have invested in the ETF. This might not sound like much, but expenses can eat away at your returns over time, so don’t overlook the cost, even though most funds will charge less than 1 percent annually.

The fund’s investments: Which area of the market is the fund investing in?

Remember that ETFs themselves are not what you’re investing in, but rather the securities the ETFs hold. The ETF is just the vehicle — you want what’s inside. This means stock ETFs will hold shares of various companies and bond ETFs will hold the debt of different companies or governments. It’s important to understand an ETF’s underlying investments before making an investment to ensure that the fund is in line with your goals. For example, if you’re looking for wide-ranging diversification, you’ll likely be a good match for an index fund that tracks a broad measure such as the S&P 500.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.