Value versus growth? Sometimes, it’s hard to tell the difference. And sometimes, it may depend on what index you are using.

Is Microsoft a growth or value stock? Most investors would say it’s a growth stock, because it has the traditional characteristics of a growth stock: earnings are growing.

But Microsoft is now being classified as partly a growth stock by Standard & Poors, and partly a value stock.

What about Meta? It too was considered a classic growth stock. Not anymore. S&P now says it is 100% a value stock.

Is ExxonMobil a growth or value stock? It has for some time been associated with value, which has been associated with companies that paid high dividends, had a lower P/E ratio and usually a lower price to book ratio. But ExxonMobil is now 100% classified as a growth stock by S&P.

And not just Exxon: Chevon, ConocoPhillips, Williams, Coterra Energy, Marathon Oil, and EQT (all energy stocks) are now considered pure growth stocks.

What gives? In the world of style and index investing, it’s not all black and white. And things don’t stay the same.

‘Value is Dead’ and the triumph of indexing

In an interview on CNBC last week, Greenlight Capital founder David Einhorn said, “Value investing as an industry is dead …The money has moved from value investors to index funds and it’s not coming back.”

He’s certainly right about one thing: a decade of outperformance by growth stocks has left a smaller pool of value investors, and much of the value investor money (and a lot of other people’s money) has moved to indexing.

Because of the triumph of indexing, many investors don’t try to buy individual stocks they think represent growth or value anymore. They just buy indexes, or more accurately mutual funds or ETFs that track those indexes.

There are several large growth and value ETFs that have attracted big money: The iShares S&P Growth and the iShares Value are based on indexes developed by Standard & Poor’s.

There are also the Vanguard Growth and Vanguard Value funds, which are based on indexes developed by the Center for Research in Security Prices. The iShares Russell Growth and iShares Russell Value also provide competition.

Those ETFs are based on indexes developed by FTSE Russell. Those indexes do not all calculate growth or value in exactly the same way.

S&P growth and value criteria: It’s not that simple

The S&P rebalances its growth and value indexes every year at the end of December. This is fairly routine, but because of the wild price action last year a lot of stocks have moved at least partially from growth to value, and vice-versa.

It’s leaving a lot of people trying to figure out what exactly a growth or value stock means.

The S&P 500 market capitalization is divided roughly equally into growth and value. One of the quirks of the indexes is that it’s rare when a stock is 100% classified as just a growth or value stock.

There are three criteria to be in growth: a three-year change in earnings per share, three-year change in sales per share, and 12-month price momentum. Higher is better.

There are three criteria to be in value: lower book value to price, lower earnings to price, and lower sales to price.

Each stock gets weighted with each criteria. Each stock ends with a growth score and a value score.

Why is Microsoft partly considered a value stock?

The price decline in big tech stocks in 2022 (Microsoft was down 28%) was a killer for the growth camp. Because price momentum is a factor, the big decline pushed Microsoft from having a zero weighting in value and a 100% weighting in growth in 2021 to a 58% weighting in growth and 42% weighting in 2022 in the S&P indices.

Is it fair to split stocks, to say that some are value and some are growth?

“The basic concept is they want the market capitalization to be split evenly between growth and value, and the only way to do that is for stocks to end up in the middle is to apportion those stocks partly to value and partly to growth,” Aniket Ullal, head of ETF data and analytics at CFRA, told me.

Ullal noted that while these particular indices can apportion stocks partly to growth and partly to value, S&P does have “pure” growth and value indices that allow investors to use a targeted exposure to growth and value.

The constituents of those indices hold very high growth and value scores.

Why are Exxon and other energy stocks now considered entirely growth stocks?

Again, price momentum was a major factor.

“Energy companies benefited from surging commodity prices last year, as the S&P 500 Energy sector recorded its highest calendar year total return ever (up 66%),” Hamish Preston, director, U.S. equity indices for S&P Dow Jones Indices, wrote in a recent note.

Other factors used to determine growth (earnings change and sales growth figures) were also strong for energy stocks.

It was enough to push all the major energy stocks into the growth camp.

Index construction can get you different results

Because of small differences in the way the indices are constructed, as well as when they are rebalanced, indexes that track a “style” (like growth or value) can have different performances from year to year.

You can see this in the performance of the respective growth ETFs this year.

Growth ETFs in 2023 (year to date)
Vanguard Growth (VUG) up 11.30%
iShares S&P Growth ETF (IVW) up 5.6%
iShares Russell 1000 Growth (IVW) up 9.2%

However, these are unusually large discrepancies, Ullal said.

2022 was an anomaly, due to the very large swings in stocks and sectors.

Because of the big price and sector moves last year, “This is the first year we have seen such a dramatic divergence in the growth and value indexes,” he said.

Still, there is a more than 5 percentage point difference between Vanguard Growth and iShares S&P Growth so far this year.

What accounts for the big discrepancy? Partly, it is the emphasis on momentum as a factor in the S&P calculations, according to Ullal.

“The CRSP index that Vanguard uses has a 10% higher weight in technology than the S&P index,” Ullal said. “When technology rallied big in January, the Vanguard Growth ETF outperformed.”

You can see this just by looking at the weighting of Microsft in the respective indices:

Microsoft weighting
Vanguard Growth ETF (VUG) 10.7%
iShares S&P Growth (IVW): 6.2%

Even when an index rebalances can affect performance

While the factors that go into the index are the most important determinant of performance, they are not the only data points that can change the calculations.

Even the time of rebalancing can affect performance.

Shelly R. Simpson, senior analyst of portfolio and market strategy at Truist Advisory Services, has noted a similar performance divergence between growth and value ETFs for the S&P 500 and the Russell 1000. She attributes most of this to timing of the annual rebalances (S&P occurs in December, Russell in June).

“The performance divergence this year between the S&P and Russell value and growth ETFs can be explained by differences in the timing of the annual rebalancing of constituents,” she wrote in a recent note.

What’s it all mean?

The key takeaway: There is no “right” or “wrong” way to construct an index.

“There is no universal agreement on what constitutes growth or value,” Ullal said. “There is a judgment made by every index advisor.”

There has never been 100% agreement on what a growth or value stock is.

But 30 years ago, issues like what is a value stock and what is a growth stock were largely determined by specialized stock pickers who set up mutual funds and hedge funds to attract investors.

They didn’t agree entirely on the issue at that time either, but the world was much smaller.

What’s different now is the triumph of indexing.

The world has moved to investing in ETFs that use indexes to determine the criteria. The indexes, combined with ETFs, enable the public to buy on a very large scale.

The investing public has benefitted from the lower cost and scale of indexing and ETFs. But it has bought more of the onus on the individual investor to have an understanding of what they own.

“The most important takeaway from the performance divergence among value and growth vehicles is investors need to know what they own,” Simpson said. “Then they can determine what is driving performance and whether they remain comfortable with the positioning.”