Growth stocks are clobbering value stocks in 2009, in what is a sharp reminder that “value” does not equal “safe.”

It’s a mistake I see investors make time and time again. They assume that when the economic environment gets tough, the best thing to do is hunker down and buy “cheap” stocks with low price-to-earnings ratios, low price-to-book ratios and higher yields. They figure that these stocks have more of a cushion on the downside than growth stocks with higher valuations.

But history—and recent returns—shows otherwise.

The iShares S&P Growth ETF (NYSE Arca: IWV), for example, is beating the iShares S&P 500 Value ETF (NYSE Arca: IVE) by 6.4% in 2009, with the funds down -7.8% vs. -14.2%, respectively.

That outperformance continues as you look back three, six and 12 months:

• 3 Months: -8.9% vs. -20.1%
• 6 Months: -30.7% vs. -38.0%
• 12 Months: -33.8% vs. -47.1%

In fact, IWV is now beating IVE on a three-year basis, with annualized returns of -7.75% for the growth fund vs. -9.29% for the value fund. You have to look back five years before the value fund jumps ahead.

No one is going to be celebrating either return, of course. It’s hard to get excited about negative anything. But these results are a reminder that growth stocks often hold up better than value stocks during difficult markets.

It makes sense, of course: Value stocks are value stocks because the market thinks there is risk in their business models. The market thinks they will have trouble growing their businesses, or worse, that they could face the threat of losses or even bankruptcy if times get really tough. When you add in a tough economic environment, value companies are more likely to run into trouble than their growth counterparts.

Last 5 posts by Matt Hougan

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