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Choose · what to own · Decision 02 of 03 · Equity strategies

Inside the equity sleeve the blend beats the bet: growth and value have swapped the lead 22 times since 1977

The index, a value tilt, a growth tilt and sector funds, each against the cap-weighted market since 1972.

ApproachExamplesReturn, % a yearWorst ten years, % a yearWorst fall behind the marketTracking error
Cap-weighted index VOO, SPY, VTI 11.2 -2.5 — —
Large value tilt value index funds 13.4 -1.3 −54% 9.2%
Large growth tilt growth index funds; QQQ (technology-heavy) 11.1 -2.8 −39% 3.9%
50/50 value and growth, rebalanced the two funds together 12.5 -1.8 −19% 3.6%
Ten sectors, equal weight one sector fund each, rebalanced 11.6 -0.3 — 3.2%

Nominal, 1972 to 2026, Kenneth French Data Library: market factor, large value and large growth from the six size-and-value portfolios, ten industry portfolios. Funds are named as examples of a mechanism, not as recommendations.

−19%Worst fall behind the market for the 50/50 blend, against −39% for growth alone and −54% for value alone.
13yearsLongest unbroken lead by one style (value). A tilt you cannot hold for that long is a bet you will close at the bottom.
5.6of 10Where this year's best sector lands next year, on average. Rank correlation year to year: 0.09.
Area chart of large growth minus large value, rolling five-year annualized, 1972 to 2026: blue above zero when growth leads, orange below when value leads. The lead changed 22 times; value's longest run was 13 years, ending in the late 1980s; growth led through most of the 2010s and the gap is −9.2 points now.
Rolling five-year annualized return of large growth minus large value, value-weighted, 1972 to 2026. Source: Kenneth French Data Library.
Bar chart: for each rank a sector held in one calendar year, its average rank the next year, 1972 to 2025. Every bar sits near the mid-table line at 5.5; the best sector of one year averaged 5.6 of 10 the next.
Ten value-weighted industry portfolios ranked by calendar-year return, 1972 to 2025. Buying last year's winner each January returned 11.9% a year against 11.8% for holding all ten, before the turnover and the tax the chase pays every year.
Verdict

Own the index as the base. If you tilt, own both sides of the style pair and accept about 4% tracking error; a tilt to one side is a 13-year commitment. Sector funds are bricks for a standing tilt, never a forecast.

Strategy cards

The 4 cards behind this decision

  1. Cap-weighted indexEvidence supports The index is the default every other card has to beat after cost and tax; on 54 years only value did, and it charged a decade of regret for the privilege. 2–20 bps a year · in kind · card only, read coming
  2. Value tiltEvidence mixed The premium is real over a career-length sample and was invisible for the back half of it; hold this tilt only if you can be wrong for longer than feels reasonable. 10–90 bps a year · qualified dividends · A value tilt has earned 0.5 points a year since 1985, and none of it since 2006
  3. Growth tiltEvidence mixed Growth is the tilt everyone owns after it has worked; on 54 years it earned the market's return with a 39% relative drawdown, and the case for it is a blend with value, not a bet against it. 4–60 bps a year · in kind · card only, read coming
  4. Sector fundsEvidence mixed Sector funds are good bricks and bad crystal balls: hold several as a standing tilt away from the index's concentration, never as a rotation. 8–40 bps a year · in kind · card only, read coming

A card states what a strategy is, its evidence with period and source, when it worked and failed, what access costs, its tax profile, capacity and behavior demand, and a verdict. Open cards carry no evidence yet and are published only when filled.

1 short read in this decision, about 5 minutes, below.

Start here1 read · 5 min

The few ideas everything else rests on.

  1. A value tilt has earned 0.5 points a year since 1985, and none of it since 2006

    A 0.20 HML tilt run at roughly 2% tracking error beat the market by 0.5 points a year since 1985. Nearly all of that edge arrived before 2007, and it has not returned since.

    5 min
Concepts used here
FactorTracking errorTransfer coefficient
Concepts

Terms this topic relies on

All concepts
FactorTracking errorTransfer coefficient