Style Index

A style index divides the stock market into growth and value categories based on fundamental characteristics. Growth indices comprise stocks with high earnings growth, low book-to-market ratios, and momentum; value indices comprise stocks with high book-to-market ratios, low valuations, and high dividend yields. Style indices are used to benchmark style-specific funds, analyze style rotation, and isolate the returns attributable to the growth/value factor from other return drivers.

How style indices are constructed

Index providers like S&P Dow Jones Indices, MSCI, and Russell define growth and value using quantitative scoring. A typical approach assigns each stock a growth score (based on earnings growth, sales growth, price-to-earnings ratio, price-to-book ratio) and a value score (based on book-to-market, dividend yield, earnings yield). Stocks are ranked and the top 50% by score form the growth index; the bottom 50% form the value index. Neutral stocks fall between.

An alternative approach uses style boxes: a nine-cell grid of size (large-cap, mid-cap, small-cap) by style (growth, core, value). A stock’s position in the grid determines which indices it belongs to. MSCI, Morningstar, and Russell all use style-box frameworks to categorize funds and stocks.

The methodology matters: a stock classified as value by Russell might be classified as core by MSCI if their scoring disagrees. This can lead to style drift in funds: a fund manager benchmarked to the Russell 1000 Value Index may find some holdings shift out of value classification over time as earnings growth accelerates.

Performance divergence and style rotation

Growth and value indices often diverge sharply in performance. In the 1998–2000 dot-com bubble, growth stocks (especially large-cap tech) vastly outperformed value. The Nasdaq 100 Growth index gained 80%+ while the Russell 2000 Value index gained 20% or less. After the bubble burst in 2000–2002, the performance reversed: value rebounded while growth crashed.

This style rotation has repeated in cycles:

• 2009–2016: Growth outperformed as interest rates stayed low and tech disruption accelerated.
• 2017–2018: Value briefly outperformed as interest rates rose and commodity prices recovered.
• 2019–2021: Growth dominated again as Covid accelerated digital transformation and the Fed returned to easy money.
• 2022–2023: Value rebounded sharply as interest rates rose and inflation pressured growth valuations.

Style indices are useful benchmarks for factor-based investing because they isolate the growth/value performance premium or drag separately from market returns. If a value investor’s fund returns 5% and the Russell 2000 Value Index returns 7%, the 2% underperformance is due to manager skill or costs, not to style tilting itself.

Major style index families

Russell Indices (owned by FTSE Russell, part of the London Stock Exchange Group) are widely used for U.S. equities:

• Russell 1000 Growth / Value: Large-cap stocks (>$3B market cap), divided by style.
• Russell 2000 Growth / Value: Small-cap stocks, divided by style.

MSCI Indices are global and widely tracked:

• MSCI USA Growth / Value: U.S. large and mid-cap, segregated by style.
• MSCI World Growth / Value: Global developed-market equities by style.

S&P Indices:

• S&P 500 Growth / Value: The S&P 500 divided into growth and value halves.

Each family has slightly different methodologies, leading to performance divergence. Managers benchmarked to Russell may use Russell style indices; those benchmarked to MSCI use MSCI indices. The choice of index affects performance evaluation.

The growth vs. value debate

The Fama-French three-factor model (1993) showed that value stocks have systematically outperformed growth stocks over long periods (1926–1993 in the academic data). This spawned a decades-long assumption that value was a “factor” deserving a return premium, analogous to small-cap premium.

However, the 1998–2000 outperformance of growth and the 2019–2021 outperformance of growth led some to question whether value truly is a persistent factor. Modern research suggests that:

1. Value premium may be time-varying: It is strong in periods when risk-free rates are rising and weak in periods of falling rates. When the cost of equity is high, cheap stocks offer better expected returns; when it is low, growth stocks’ long duration of profits is more valuable.

2. Style correlates with earnings-yield factor: A deep statistical analysis shows that much of the value premium is driven by simple mean reversion in earnings yields: stocks with low P/E are temporarily cheap and mean-revert upward, generating outperformance. Growth stocks, by contrast, are susceptible to disappointment if earnings growth fails to materialize.

3. Sector and mega-cap effects matter: Recent decades saw massive concentration in large-cap tech growth. The “value premium” may have been depressed not by value’s lack of merit but by structural shifts in the market: tech disruption, passive investing, and changing consumer behavior all tilted the economy toward growth stocks, especially mega-cap ones.

Practical use for investors and managers

Mutual funds and ETFs often benchmark themselves to style indices. A “Large Cap Growth” fund might target outperformance of the Russell 1000 Growth or S&P 500 Growth index. Performance evaluation explicitly separates style return (the return of the index) from excess return (the manager’s outperformance or underperformance of the index).

Asset allocators use style indices to implement tactical style rotations. A portfolio manager might increase allocation to value indices when valuations are cheap and interest rates are rising, or shift to growth when rates are falling and tech disruption is accelerating. Style rotation strategies attempt to improve returns by dynamically shifting the growth/value tilt.

Index funds that track style indices offer investors pure exposure to growth or value without active management. A Russell 2000 Value ETF gives exposure to U.S. small-cap value stocks with minimal costs.

Challenges and recent developments

Style persistence: A stock classified as value one year may be growth the next if earnings accelerate. This classification change affects the indices and can cause tracking error for funds benchmarked to the style indices.

Overlap in large-cap indices: As the overall market has become more concentrated in mega-cap tech, the overlap between growth and value indices has increased. The top 10 holdings of large-cap value indices increasingly include tech stocks that might once have been classified as core or growth, blurring the distinction.

International style divergence: Growth/value behavior varies by region and country. European value stocks behave differently than U.S. value stocks; emerging-market style correlations differ from developed-market ones. Global style indices attempt to standardize, but regional differences persist.

ESG integration: Newer style indices incorporate environmental, social, and governance (ESG) factors into growth and value classifications. A “sustainable growth” index might emphasize growth stocks with strong ESG credentials, blending style and ESG factors.