Value vs Growth Stocks: What Five Themes Reveal About Deep Falls

When people compare value vs growth stocks, they are usually comparing two kinds of bets. Value means cheap, neglected sectors such as energy, banks and materials, which tend to win when sentiment turns. Growth means exciting, expensive sectors such as technology and innovation, which tend to win while the story holds. Both can deliver strong returns, and both can fall further than almost anything else in the market.

This article looks at both styles through investment themes: sectors or stories you can hold through a single ETF. The data shows why themes attract investors and why they demand careful sizing.

Value vs growth stocks: two kinds of themes

Many ideas investors add on top of a broad core holding are not individual companies but themes: semiconductors, artificial intelligence, energy, banks, uranium, disruptive innovation. Broadly, they fall into two groups.

Value themes

• Neglected, cheap sectors
• Examples: energy, banks, materials
• Tend to do well when sentiment turns in their favour

Growth themes

• Exciting, expensive sectors
• Examples: technology, innovation
• Tend to do well while the story holds, and can fall hard when it breaks

Neither style is safe. A value theme can stay cheap for years before sentiment turns. A growth theme can look unstoppable right up to the moment its story cracks. Either way, recovering from a mistake can take years.

Five themes: strong returns, very deep falls

The figures below cover five US-listed sector ETFs, each from its own start date to June 2026. "Return a year" is the compound annual growth rate of holding the ETF throughout. "Worst fall" is the largest peak-to-trough drawdown.

A few things stand out:

• Good long-run returns hid brutal interim losses. Semiconductors returned 10.7% a year but lost 85.9% along the way. Recovering from a fall that deep requires a gain of roughly 610%.
• Value themes fell too. US financials, a classic value sector, lost 82.7% in the financial crisis. Energy lost 71.3%.
• Some stories never paid off. Uranium fell 93.5% and still shows a loss of 3.2% a year over its whole history. After a 93.5% fall, $10,000 becomes $650.

The theme cycle: popularity is a warning sign

Themes move in cycles of attention. By the time a theme dominates the headlines and new funds launch every week, much of the good news is usually already in the price.

The disruptive innovation ETF in the table is the clearest example. In early 2021 it was one of the most talked-about funds in the world, and that was its peak. It then fell 81%. Investors who arrived because everyone was talking about it arrived at the worst possible moment.

Popularity tells you a theme is well known, not that it is cheap or that the story will continue. Often it is a reason for extra caution.

Why exit rules matter for themes

Themes tend to have long, deep bear markets. That is exactly the kind of market where trend following has historically helped most, as the backtested figures above suggest. A rule cannot prevent losses, but it can stop a broken position from riding all the way down.

An exit rule does not need to be technical. A written condition that defines when the story is broken works too, for example: "If the reason I own this theme no longer applies, I leave." The point is to decide in advance, while calm, rather than in the middle of a fall.

Common mistakes the lesson highlights:

• Moving core, long-term money into a theme
• Averaging down without any limit as the price keeps falling
• Holding a broken story out of hope

A theme is a bet, not a plan

The most useful idea in this topic is a sizing test that is easy to state and hard to follow: if being wrong about this theme would change your life, the position is too big.

Investors who use themes often keep them small, inside a satellite part of the portfolio separate from their core holdings, and spread them across several themes rather than one. That way a single 80% or 90% fall hurts, but does not derail long-term plans.

What to do with this

• Look up the worst historical fall of any theme or sector ETF you hold or are considering. Ask whether you could sit through it at your current position size.
• Run the sizing test. If being wrong would change your life, the position is too big.
• Write down an exit condition for each theme before you need it.
• Check how many themes you hold. One theme concentrates the risk of one story breaking.
• Treat headlines with caution. If a theme is everywhere, note how much good news may already be priced in.

This article is based on Lesson 8.2 of our course Mastering Investments, where Module 1 is free.

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