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Stocks started to defy gravity with North American U.S. indexes eventually hitting records driven by high-flying growth stocks.Nathan Denette/The Canadian Press

It was March 23, 2020, and stocks had just finished rolling off the COVID-19 cliff. Vanguard’s FTSE Canada All-Cap Index ETF (VCN-T) plunged 37 per cent over the previous 31 days. The iShares Core S&P 500 Index ETF (XUS-T) fell 27 per cent over the same period.

Investors know what happened next: Stocks started to defy gravity in the months ahead, with North American indexes eventually hitting records driven by high-flying growth stocks.

Now assume you had $100,000 and a time machine. If you went back to March 23, 2020, would you make more money putting it all in a Canadian growth stock ETF or a Canadian value stock ETF? High-flying stocks like Shopify Inc. led the growth stock index. In contrast, the value stock index is mostly comprised of boring businesses your great-grandpa might have bought. They typically have slower corporate earnings growth and low price-earnings ratios.

Most people would have wrongly picked the Canadian growth stock index, says Sonny Wadera, a financial adviser with Kelson Financial, an affiliate of Manulife Securities Investment Services Inc. in St. Laurent, Que.

“That would mostly be a function of buying what’s trendy,” Mr. Wadera says, “and the desire to rely on recent results.”

Since that market low in March 2020, growth and value stocks have both performed well, but Canadian value stocks have outperformed.

For example, a $100,000 investment in the iShares Canadian Growth Index (XCG-T) would have grown to about $160,400 by Aug 9, 2022. That’s a great return. But if $100,000 were invested in the iShares Canadian Value Index ETF (XCV-T) it would have swelled to about $214,000 over the same time period.

The value-stock triumph isn’t necessarily a fluke, explains Marcelo Taboada, an associate portfolio manager with Tulett, Matthews & Associates in Montreal.

He notes that Canadian growth stocks, as measured by the MSCI Canada Growth Index, averaged 7.3 per cent per year from Jan. 1975 to July 31, 2022. That would have turned a $10,000 investment into $284,451.

But if that $10,000 were invested in Canadian value stocks tracking the MSCI Canada Value Index, it would have averaged 10.3 per cent. That would have turned $10,000 into $1.06-million over the same time period.

According to portfoliovisualizer.com, value stocks beat growth stocks in the U.S., too. An investment split equally between large-cap, mid-cap and small-cap growth stocks in the U.S. averaged a compound annual return of 12.6 per cent between Jan. 1, 1975, and July 31, 2022. Over the same time period, a similar three-way split into U.S. value stocks averaged 14.1 per cent.

That doesn’t mean value stocks win every decade. But during the past 83, rolling 10-year periods, value stocks beat growth stocks 85 per cent of the time.

Value typically wins because investors generally have low expectations for the growth of a value stock’s business earnings. And when such net earnings exceed expectations, surprised investors bid the stock prices up.

In contrast, investors have high expectations for growth stocks. As a result, when a growth stock’s business earnings don’t match or exceed expectations (even if the company still reported strong business growth) disillusioned investors often sell en-masse.

And when the broad stock market plunges, the stocks we’ve pegged the highest hopes on – those growth stocks – typically fall furthest.

For example, seven of the calendar years between 1972 and 2021 saw U.S. stocks fall by more than 7 per cent. According to portfoliovisualizer.com, value stocks trounced growth stocks during all seven of those losing years – by an average of 9.2 per cent per year.

Mark Twain once said that history doesn’t repeat itself, but it does rhyme. This year seems to be no exception. While the overall markets are down, growth stocks – as they’ve done in the past – are taking the biggest beating.

For example, U.S. growth stocks, as measured by Vanguard’s Growth ETF (VUG-A) is down about 20 per cent this year to Aug. 9 (measured in Canadian dollars). In contrast, BMO’s MSCI USA Value Index ETF (ZVU-T) has dropped just 10.6 per cent.

Canadian value stocks are holding up even better. For context, the iShares Canadian Growth ETF (XCG-T) is down 9.4 per cent this year to Aug. 9, while the iShares Canadian Value ETF (XCV-T) is down just 0.74 per cent over the same period.

Value stock ETFs are like baseball players who never hit the ball out of the park. They don’t grace the cover of magazines. They aren’t the kind of companies that are set to change the world. But they get to first base almost every time they’re at bat. A team of such players is really tough to beat.

That doesn’t mean you should stack your portfolio entirely with value stocks. It does mean, however, that investors shouldn’t neglect them.

If you already invest in a diversified portfolio of broad-based market ETFs, you have little to worry about; your portfolio has its share of growth and value stocks. But if you’re still in love with growth stocks and shunning value, you might do better to reconsider that plan.

“There are no guarantees in equity investing,” Mr. Wadera says, “But successful investing is all about putting the odds in your favour.”

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