AI, Tech Fuel Rebound Of Vanguard Growth ETF, Eroding Value's 2022 Outperformance

The surge of artificial intelligence (AI), the supremacy of the internet giants and expectations of the Fed's tightening cycle nearing its end are propelling growth companies to outperform value stocks.

The growth equity style has made a remarkable recovery in the first five months of 2023, after experiencing a setback in 2022 due to aggressive interest rate hikes that impacted tech and other overvalued sectors.

The Vanguard Growth ETF VUG has outperformed the Vanguard Value ETF VTV by a remarkable 29% so far this year. While the growth-oriented ETF has risen 26%, the value-oriented ETF has struggled, registering a 3% decline year to date. 

Only a month ago, the performance gap between growth and value was about 8%, which can offer an idea of how rapidly growth-related companies have surged in recent weeks.

Growth vs. Value in 2023

Value's 2022 Outperformance vs. Growth: Wiped Out in 5 Months

The roughly 50% gain that value stocks had over growth in 2022 was almost entirely wiped out by the growth's outperformance in the just five months of 2023.

Since the Great Financial Crisis, the consistent outperformance of growth versus value stocks has been a recurrent trend in the U.S. stock market. This tendency has been supported by a protracted period of very low interest rates, which has pushed up valuations in the technology and growth sectors while depressing stocks in value-related sectors.

The year 2022 looked to suggest a potential reversal of this pattern, with energy stocks rising sharply and technology-related stocks falling precipitously. However, this reversal was short-lived, as growth stocks reasserted their dominance in 2023, supported by a robust surge in AI and tech stocks.

Chart: 15 Years Of Value Vs Growth

Stock Movers: Gainers And Losers

About 70% of the Vanguard Growth ETF's year-to-date performance can be attributed to seven stocks: Apple, Inc. AAPL added 4.7 percentage points (ppt) to the overall performance

• Microsoft Corp. MSF 4.2ppt
• NVIDIA Corp. NVDA 2.7ppt
• Alphabet Inc. GOOG GOOGL 2.2ppt
• Amazon Inc. AMZN 1.9ppt
• Tesla Inc. TSLA 1.2ppt
• Meta Platforms Inc. META 1ppt.

The Vanguard Value ETF saw negative contributions from financials, health care and energy sectors with First Republic Bank, Pfizer Inc. PFE, Johson & Johnson JNJ, Charles Schwab Corp. SCHW, Chevron Corp. CVX and Bank of America BAC being the worst contributors to the performance.

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