Growth vs. Value: What to Buy?

By Ian Wyatt

Most people tend to think that small-cap stocks are all growth companies. The prevailing wisdom is that if a company has a market cap below $3 billion, then the reason to buy shares is that the company has tons of room to grow and perhaps eventually become a large-cap stock, and in the process earn early investors multiples on their initial investment.

But this perspective doesn't show the entire picture. There are tons of small-cap value stocks out there, and many of these companies don't ever expect to grow to be true large-caps. Maybe they see their future as a mid-cap company some day, but in the meantime they are focused on consistent performance, and paying dividends to shareholders.

It's relatively easy to dissect small-cap performance these days by looking at ETFs. Doing so allows us to determine whether it's better to buy small-cap value right now, or whether small-cap growth should earn your dollars.

The 10-year chart below shows the price performance of the iShares Russell 2000 ETF (IMW). The ETF tracks the entire underlying index and is a blend of both value and growth. As you can see it is just about back to its 2007 high around 80.

Under this I've plotted the performance of the iShares Russell 2000 Growth ETF (IWO) and the iShares Russell 2000 Value ETF (IWN).

According to these ETFs, small-cap value has outperformed small-cap growth over the past 10 years by a wide margin -- more than 50 percent in fact.

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