Growth ETF vs. Value ETF: Which Should You Invest In?

Choosing between a growth ETF vs. value ETF depends on several factors, including your investment style, time horizon and risk tolerance. However, there are some key differences. Growth ETFs typically focus on companies expected to expand faster than the broader market. This often includes sectors like technology and healthcare, although these are infamously volatile. Value ETFs, on the other hand, invest in companies considered undervalued. This is based on considerations such as earnings and book value, with successful companies typically offering steadier returns and dividends. Before making an investment, consider these factors when comparing a growth ETF vs. value ETF for your portfolio.

Talk to a financial advisor who can help you determine the best investments for your portfolio based on your financial goals and risk tolerance.

What Is a Growth ETF?

A growth ETF is an exchange-traded fund (ETF) that holds a collection of stocks from companies expected to grow earnings, revenue or cash flow at an above-average pace compared to the overall market.

Instead of distributing dividends to shareholders, these companies typically reinvest earnings in research, product development, acquisitions or market expansion. This reinvestment strategy can accelerate their growth trajectory, making them attractive to investors seeking long-term capital appreciation.

Growth ETFs are often heavily weighted toward sectors where innovation and disruption drive business success. Technology companies are the most common examples. However, growth-oriented firms can also be found in industries such as healthcare, communications and consumer discretionary. By pooling many of these stocks together, growth ETFs give investors diversified exposure to high-potential companies. This helps mitigate the risk of investing in just one or two individual stocks.

One key trait of growth ETFs is that they tend to carry higher risk and volatility than other types of investments. The value of many underlying companies depends on future potential rather than current earnings. Therefore, their stock prices can fluctuate dramatically in response to changes in market sentiment, interest rates or economic conditions.

For example, growth stocks often perform well during periods of low interest rates. During this time, borrowing costs are cheap and investors are willing to pay a premium for future growth. However, they may lag when interest rates rise or during market downturns.

What Is a Value ETF?

A value ETF is an exchange-traded fund that invests in the stocks of companies considered undervalued by the market.. This is based on specific financial metrics, such as price-earnings (P/E) ratios, price-to-book (P/B) ratios or dividend yields.

These companies may not grow as quickly as growth ETFs, but they are still seen as fundamentally strong businesses. This is because they allow for trading at a discount relative to their intrinsic value. Investors turn to value ETFs when they want exposure to solid companies with the potential for stable returns and less downside risk.

Value ETFs often focus on market sectors like financials, energy, industrials and consumer staples. These are all sectors that typically generate consistent earnings and may pay regular dividends.

Because underlying companies are more established with predictable cash flows, value ETFs are generally less volatile than growth ETFs. This stability makes them appealing to investors who prioritize capital preservation or income generation.

Another defining characteristic of value ETFs is that they tend to perform better during certain phases of the market cycle. When interest rates are rising, inflation is high or the economy is slowing, investors often shift toward value-oriented strategies. This is because these companies usually trade at lower valuations. It makes them less sensitive to fluctuations in investor sentiment and more resilient during a recession.

Differences of Growth Investing and Value Investing

While both growth investing and value investing aim to build wealth, they take completely different approaches to achieving that goal. Growth investing focuses on companies with strong potential for future expansion. Meanwhile, value investing targets companies that appear undervalued compared to their intrinsic value.

Understanding the key differences can help you determine which strategy—or combination of both—fits best within your portfolio.

Market Cycles

Growth strategies tend to outperform during periods of economic expansion and low interest rates. At this time, investors are more willing to pay a premium for future earnings. Value strategies often shine during slower economic growth, higher inflation or market corrections, when investors prioritize stability and undervalued opportunities.

Company Characteristics

Growth investing emphasizes businesses with high revenue growth, innovative products and expanding market share. This is often in sectors like technology or healthcare. Value investing, by contrast, looks for established companies that may be temporarily overlooked by the market. However, they still maintain solid financials and long-term potential.

Valuation Metrics

Growth investors typically accept higher price-to-earnings (P/E) and price-to-book (P/B) ratios. This is because they believe future earnings will justify today’s higher valuations. Value investors rely on lower multiples and seek companies trading below their intrinsic worth, often signaling a bargain opportunity.

Risk and Volatility

Growth stocks can experience sharp price swings because their valuations are tied to expected future performance. It makes them more sensitive to market sentiment and interest rates. Value stocks, on the other hand, are generally less volatile and can provide downside protection during market downturns.

Return Potential

Growth investing offers the potential for outsized returns if the companies deliver on their growth projections. However, this comes with higher risk. Value investing usually produces steady, more predictable returns, often supplemented by dividends. The downside is that it may not match the explosive gains of growth stocks.

Choosing the Right Investments for Your Portfolio

When deciding between a growth ETF vs. value ETF, carefully consider your individual financial goals, time horizon and risk tolerance.

Growth ETFs may offer higher long-term returns, but their volatility can be challenging for investors who need stability. Value ETFs, on the other hand, provide steadier performance and often generate dividend income. This can be attractive for those seeking a reliable income stream.

Many investors find that a blend of both growth and value ETFs creates a well-rounded portfolio. By combining the high-growth potential of innovative companies with the stability of established, undervalued firms, you can capture returns in different market environments. For example, growth ETFs may outperform during economic expansions, while value ETFs can help cushion losses during downturns.

Your investing strategy should also account for your timeline. Younger investors with decades until retirement may lean more heavily toward growth ETFs to maximize long-term compounding. Meanwhile, those closer to retirement may prefer value ETFs for their stability and income potential.

Rebalancing your portfolio periodically ensures that your asset allocation remains aligned with your financial goals, even as market conditions and personal circumstances change.

Ultimately, there is no one-size-fits-all answer. The right choice comes down to aligning your investments with your broader financial plan.

If you are unsure whether a growth ETF vs. value ETF makes sense for you, speak with a financial advisor. A professional can help you evaluate your risk profile, diversify effectively and build a profitable portfolio designed to support your long-term financial success.

Bottom Line

When comparing a growth ETF vs. value ETF, you will find several unique advantages. Ultimately, however, the best choice depends on your financial goals, timeline and risk tolerance. Growth ETFs can deliver higher long-term returns but come with more volatility. In comparison, value ETFs provide stability and income potential through dividends.

For most investors, a balanced approach incorporating both can help capture opportunities across different market cycles while reducing overall risk. Aligning your strategy with your personal objectives, and adjusting your allocation as circumstances change, is the key to building a portfolio that supports lasting financial success.

Tips for Investing

Investing may require expertise that you don’t have. Having an expert, such as a financial advisor, in your corner can help you grow your portfolio faster while looking out for your own needs and concerns you may not recognize. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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