Is the Vanguard Value ETF a Millionaire Maker?

Investors looking to maximize their gains often choose growth stocks for the job. After all, that's what these tickers are ultimately meant to do.

Volatile growth stocks aren't the only way to become a millionaire investor, however. Whether through individual stock picks or baskets of stocks in the form of exchange-traded funds (ETFs), plenty of value stocks are up to the task as well.

How about the Vanguard Value ETF (NYSEMKT: VTV)? Keep reading. There's an important discussion to add to any assessment of its foreseeable future.

Growth's key drivers are losing steam

It's an age-old argument. Growth stocks certainly have their moments in the sun, but they can crash in response to the slightest hints of trouble. Value stocks tend to be less explosive, but they're certainly more reliable when the economic going gets rough. Most of them pay decent dividends, too. They're just not very sexy.

There's also no denying that growth stocks have outperformed value stocks for some time now. For perspective, since their early 2009 low, this value ETF's growth counterpart -- the Vanguard Growth ETF (NYSEMKT: VUG) -- has easily led the two with its gain of 948%, versus VTV's (much) more modest 428% advance. Even adding reinvested dividends to the mix wouldn't push this value fund's performance up to the growth ETF's. It has been crimped by poor performances from some of its bigger holdings, like Bank of America and Johnson & Johnson.

VTV data by YCharts.

For millionaire-minded investors, though, this disparity comes with an important footnote. Growth stocks performed exceedingly well for most of this stretch largely because interest rates were abnormally low during this period. This time stretch also saw a handful of technological game-changers, like the proliferation of smartphones and the advent of artificial intelligence. Neither of these things is the case any longer, and therefore, they won't have the same bullish effect.

Oh, sure, the federal funds rate hikes in 2022 and 2023 never really pushed overall interest rates to historically outrageous levels. They're even coming down now. The Federal Reserve imposed a 50-basis-point rate cut just a couple of weeks ago, and hinted that more rate cuts were likely in the foreseeable future.

Interest rates are still apt to remain well above the next-to-nothing lows seen for most of the span between 2009 and 2021, though. This certainly gives value stocks a renewed edge, at the expense of growth stocks.

Actually, this time isn't different either

That's one theory, anyway, albeit not one everybody subscribes to. Others point out that companies largely operate independently of economic cycles these days, with innovation and circumstances being in the driver's seat. This crowd also argues that growth industries (like technology) are so closely entwined with value industries (like banking, consumer staples, or utilities) that it's impossible to chalk up their differing performances to their stylistic attributes.

To be fair, there's something to these suggestions.

The "this time is different" argument, however, rarely ends up holding water indefinitely. The value stocks that have lagged for so long are well-positioned to take the lead for a while again, balancing out the back-and-forth dance that growth and value have done for a long time.

The numbers say as much, anyway. Indeed, investment advisor Dimensional reports that since 1927, value stocks have outperformed growth stocks by an average of 4.4 percentage points per year.

Now read that again.

The true underpinnings of this modest performance edge haven't likely changed permanently in just the past decade, either.

Perhaps more important to interested investors, the analyst community is coming around on the idea. Bank of America's head of U.S. equity and quantitative strategies, Savita Subramanian, implores investors to "buy large cap value" simply because "those are the companies that are really neglected, trading at very low multiples."

She's right, although she's arguably understating the situation. Mutual fund companies Vanguard and Dodge & Cox both agree that while growth stocks are currently overvalued thanks to their breathtaking performance of late, value stocks are priced below long-term norms.

For perspective, Dodge & Cox says that while the typical growth stock is currently priced at nearly 29 times its projected per-share profits, value stocks -- at a much lower forward-looking price-to-earnings (P/E) ratio of only around 16 -- stand ready to close the gap.

It's more about the process and discipline, anyway

The question remains, however... is the Vanguard Value ETF a millionaire maker? Yes, it is, and it's perhaps the best means of becoming one for the foreseeable future.

The overdue shift described above should restore value stocks' long-term track record, putting it back on par with that of the well-diversified SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or even the aforementioned Vanguard Growth ETF. Each of these funds performs better than the others at different times. But, given enough time, they're all equally capable of making you a millionaire.

The key is, of course, remaining disciplined enough to continue making regular investments in whichever fund makes the most sense to prioritize owning at the moment, and then sticking with it even when it isn't easy to do so. Right now, that's the Vanguard Value ETF.

Just be sure to reinvest any dividends VTV may dish out while you own it, particularly if your ultimate goal is growth.

Should you invest $1,000 in Vanguard Index Funds - Vanguard Value ETF right now?

Before you buy stock in Vanguard Index Funds - Vanguard Value ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Index Funds - Vanguard Value ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $743,952!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 23, 2024

Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Vanguard Index Funds-Vanguard Growth ETF, and Vanguard Index Funds-Vanguard Value ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.