Traditional growth indices have two vital shortcomings. First, anti-value stocks (very expensive) should not necessarily growth stocks. The decision to incorporate a stock in a growth index needs to be based on fundamental growth metrics reminiscent of sales, profit or R&D spending growth, relatively than price-based metrics. Second, performance improves significantly when these indices are weighted by objective measures of growth relatively than market value. Overpaying for growth will not be helpful. We also argue that some stocks with poor growth prospects and unattractive valuations may don’t have any place in either value or growth indices.
