Asset allocation is just another way of telling investors to spread their risk by investing in multiple slices of the market. One way to slice the market is by setting aside a portion of a portfolio for growth stocks like Google (Nasdaq:GOOG) and another for value stocks like Verizon Communications (NYSE:VZ). Investors curious about whether growth has been a better asset class than value during 2008 should review the performance of the following two ETFs.
What's The Difference?
Growth stocks are expected to grow their earnings at a faster rate than value companies. Focusing on growth usually means that these companies will not pay dividends. A tech company like Google is a good example. With an above-industry average price-to-earnings (P/E) ratio of 21.34 for the trailing 12 months and no dividend to speak of, Google fits the picture of a growth stock. (Read How And Why Do Companies Pay Dividends? to learn more about the arguments for and against company dividend policies.)
Value stocks tend to be more established companies that investors believe to be trading below their true value. Since value stocks like Verizon are not as concerned with growth, they tend to have the ability to pay dividends to investors. A value investor may also note the relatively low P/E of 12.85 for the trailing 12 months and the low price/book ratio of 1.44 as signs of value.
The Vanguard Growth ETF (AMEX:VUG) lists Microsoft (Nasdaq:MSFT) and IBM (NYSE:IBM) as its largest holdings while Google rounds out its top 10. With an overweighting in information technology (IT), the fund has been particularly hard hit, falling 38.08% for the year. Given that today's market is unlike any we've seen in awhile, it's fair to mention that VUG has fallen 7.04% over the previous three years. In classic Vanguard fashion, the VUG fund sports a low expense ratio of 0.10%.
The First Trust Value Line Dividend Index ETF (AMEX:FVD) is unlike most funds where nearly 50% of the assets are invested in the top 10 holdings. The FVD ETF holds less than 1% of its assets in any one company. The Laclede Group (NYSE:LG) utility company and Campbell Soup (NYSE:CPG) are its two top holdings at 0.85% and 0.83%, respectively. Verizon comprises 0.69% of the fund. The FVD ETF is down 25.98% since the beginning of the year, but the fund has managed to sneak into positive territory by returning 2.03% over the past three years. Investors should note the fund has the highest expense ratio of the ETFs mentioned at 0.7%, but the fund also pays the highest dividend at 3.2%.
There are many slices of the market to choose from, but in this scenario value appears to have won out over growth. While it might be easy to think that value will always win over growth, that would be a mistake. The point of asset allocation is to not have to know which asset class will win, but rather to spread the risk of being 100% wrong about any one slice of the market.
To learn more about growth and value stocks, read our Stock-Picking Strategies Tutorial sections on Growth Investing and Value Investing.