Is the Vanguard Value ETF a millionaire maker?

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

However, volatile growth stocks are not the only way to become a millionaire investor. Whether through individual stock picks or baskets of stocks in the form of exchange-traded funds (ETFs), plenty of value stocks are also within reach.

How about Vanguard Value ETF (VTV -0.04%)? Continue reading. There is an important discussion to add to any assessment of his foreseeable future.

Key growth drivers are losing steam

It’s an old argument. Growth stocks certainly have their moments in the sun, but they can crash in response to the slightest hint of trouble. Value stocks tend to be less explosive, but are certainly more reliable when the economy gets tough. Most also pay decent dividends. They’re just not very sexy.

There’s also no denying that growth stocks have outperformed value stocks for quite some time. For perspective, since the early 2009 low, this value has been the ETF’s rising counterpart — Vanguard Growth ETF (NYSEMKT: VUG ) — easily led the two with a 948% gain, compared to VTV’s (much) more modest lead of 428%. Even adding reinvested dividends to the mix wouldn’t push this value fund’s performance to the level of the growth ETF. It has been marred by poor performance of some of its larger stocks such as Bank of America and Johnson & Johnson.

VTV data by YCharts.

For millionaire-minded investors, however, this difference comes with an important footnote. Growth stocks have performed extremely well for most of this period, in large part because interest rates have been abnormally low during this period. This time period has also seen a handful of technological changes, such as the proliferation of smartphones and the rise of artificial intelligence. Neither of these things are the case anymore, and therefore will not have the same upbeat effect.

Oh sure, the federal funds rate hikes in 2022 and 2023 have never pushed global interest rates to historically outrageous levels. They are really coming down now. The Federal Reserve imposed a 50 basis point interest rate cut just a few weeks ago and has hinted that more rate cuts are likely in the near future.

However, interest rates are still likely to remain well above the near-absent lows seen for most of 2009 to 2021. This certainly gives value stocks a renewed edge over growth stocks.

In fact, this time is no different

Anyway, this is a theory, though not one that everyone subscribes to. Others point out that companies operate largely independent of economic cycles these days, with innovation and circumstance taking the driver’s seat. This crowd also argues that growth industries (such as technology) are so closely related to value industries (such as banking, consumer staples, or utilities) that it is impossible to attribute their different performance to their stylistic attributes.

To be fair, there is something to these suggestions.

The “this time is different” argument, however, rarely holds water forever. Value stocks that have lagged behind for so long are well-positioned to take over for a while again, balancing the back-and-forth dance that growth and value have been doing for a long time.

The numbers say the same, 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 advantage probably haven’t changed definitively in just the past decade.

Perhaps more importantly for interested investors, the analyst community is rallying around the idea. Bank of America head of equities and quantitative strategies Savita Subramanian implores investors to “buy large-cap value” simply because “these are the companies that are really neglected, trading at very low multiples.”

He is right, although he may be underestimating the situation. Mutual fund companies Vanguard and Dodge & Cox agree that while growth stocks are currently overvalued due to their stunning recent performance, value stocks are priced below long-term norms.

For perspective, Dodge & Cox says that while typical growth stocks are currently valued at nearly 29 times estimated earnings per share, value stocks — at a much lower forward price-to-earnings (P/E) ratio from only about 16 — be ready to close the gap.

However, it is more about process and discipline

The question remains though…is the Vanguard Value ETF a millionaire maker? Yes, it is, and perhaps it is the best means of becoming one in the near future.

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

The key, of course, is to remain disciplined enough to continue making regular investments in whichever fund makes the best sense to prioritize holding at the moment, and then stick with it even when it’s not easy to do so. Right now, that’s the Vanguard Value ETF.

Just be sure to reinvest any dividends that VTV may provide while you own it, especially if your ultimate goal is growth.