Many market prognosticators have said that the out-of-favor growth stocks will finally start to outperform value stocks.

But for large-cap stocks in the S&P 500, that simply hasn't happened.

One reason could be that stocks in the iShares S&P 500 Growth fund ( IVW) haven't grown earnings appreciably faster than stocks in the iShares S&P 500 Value fund ( IVE) -- they're just more expensive!

In fact, since 2002, earnings for stocks in the iShares S&P 500 Growth fund have grown at a compound annual rate of 14.6%.

That's virtually the same rate for stocks in the iShares S&P 500 Value fund (14.4%).

And in fact, value stocks fare much better than growth stocks if you extend the analysis to include the last recession.

Regardless, stocks in iShares S&P 500 Growth fund trade at a 17.5 price-to-earnings ratio compared with 14.9 for stocks in iShares S&P 500 Value fund.

So instead of getting faster earnings growth by holding stocks in the Growth fund in exchange for the higher multiples, you just have to pay more.

However, the story in small-cap stocks is quite the opposite: Small-cap growth stocks in the iShares S&P SmallCap 600 Growth fund ( IJT) are actually growing earnings faster and are now cheaper than small-cap value stocks in the iShares S&P SmallCap 600 Value ( IJS) fund!



Source: Alta Vista Independent Research

Actually the iShares S&P SmallCap 600 Growth fund is only cheaper by a fraction, as far as the price-to-earnings ratio is concerned. Typically, you'd expect value stocks to trade at a noticeable discount to growth stocks, not at a slight premium (that's the case with the large-cap growth and value funds mentioned above).

And at any rate, most value investors are looking for stocks with P/E ratios in the 10 to 14 range, not the nearly 20 that small-cap value stocks in iShares S&P SmallCap 600 now fetch.



Source: Alta Vista Independent Research

Oddly enough, this is not the result of the small-cap value stocks outperforming small-cap growth stocks dramatically, as is the case with large-cap growth and value stocks.

In fact, although small-cap value stocks did fare better during the last recession, over the past five years the iShares S&P SmallCap 600 Growth fund has done slightly better than the iShares S&P SmallCap 600 Value fund.

Rather, small-caps in general have a dearth of "value-type" industries to begin with, and so the sector makeup of iShares S&P SmallCap 600 Value is not what you'd expect from a value fund.

As you will see in the chart below, highflying consumer discretionary stocks make up 29% of assets (compared with 8% of assets in the large-cap S&P 500 Value fund). Technology stocks make up another 14% (vs. 7%). Meanwhile, financials, which are typically value stocks and account for 35% of iShares S&P 500 Value fund, make up only 20% of assets in iShares S&P SmallCap 600 Value.



Source: Alta Vista Independent Research

Whether the faster earnings growth of stocks in the small-cap growth fund will persist in the future is uncertain, but since they trade at essentially the same P/E as those in the iShares S&P SmallCap 600 Value, it's like getting potentially better growth prospects for free.

Once again, our analysis shows that you can't judge an ETF by its name.
Michael Krause is president and founder of AltaVista Independent Research. AltaVista provides fundamentally driven analysis of exchange-traded funds to help investors select ETFs based on investment merit, much the same way they would evaluate a single stock. The firm offers both print and online ETF research to subscribers, but does not manage clients' money. Mr. Krause is also a frequent contributor to broadcast and print media.

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