The Diminishing Relevance of Value Investing in Today's Market Regime

The investment landscape in 2025 has been defined by a stark divergence in factor performance, with value investing increasingly overshadowed by the meteoric rise of growth and momentum strategies. While value stocks have historically offered a bulwark of defensive resilience and attractive valuations, their underperformance against AI-driven growth and high-momentum equities has raised questions about their relevance in today's market regime. This analysis examines the interplay of factor performance and fund cost efficiency to assess whether value investing remains a viable pillar of diversified portfolios.

Factor Performance: Momentum and Growth Dominate

Momentum and growth have emerged as the twin engines of equity returns in 2025. According to a Bloomberg report, the momentum factor outperformed other factors year-to-date across the U.S., Europe, and emerging markets, driven by sustained demand for high-beta, high-growth stocks tied to AI and the "Magnificent 7". For instance, the Invesco S&P 500 Momentum ETF (SPMO) surged by 27% in 2025, outpacing the S&P 500 itself. This trend mirrors the performance dynamics of 2017, when growth stocks similarly capitalized on a low-interest-rate environment and technological innovation.

Value stocks, however, have struggled to keep pace. While the S&P 500 Pure Value Index showed a brief resurgence in August 2025-with 77.6% of its constituents outperforming the broader market-this resilience was largely confined to Europe and emerging markets. In the U.S., value strategies lagged significantly. The Vanguard Value ETF (VTV), for example, has gained just 203% over the past decade compared to 400% for the Vanguard Growth ETF (VUG). This disparity underscores a structural shift: investors are increasingly prioritizing earnings growth and innovation over traditional metrics like price-to-earnings ratios.

Cost Efficiency: A Double-Edged Sword for Value

Factor-based ETFs have long been praised for their cost efficiency, but the performance gap between value and momentum/growth strategies has complicated this dynamic. Data from Bankrate reveals that value ETFs like the iShares S&P 500 Value ETF (IVE) and SPDR Portfolio S&P 500 Value ETF (SPYV) maintain expense ratios as low as 0.04% to 0.18%, comparable to their growth and momentum counterparts. Momentum ETFs such as SPMO and the iShares MSCI USA Momentum Factor ETF (MTUM) also operate within similar cost ranges, with economies of scale enhancing their efficiency amid surging inflows.

Yet cost advantages alone cannot offset underperformance. While value ETFs remain competitively priced, their returns have failed to justify the trade-off for investors seeking growth in an AI-driven economy. As noted by Vaneck, smart beta strategies-including value-offer transparency and lower costs, but their appeal hinges on delivering risk-adjusted returns that align with market conditions. In 2025, the dominance of momentum and growth has rendered cost efficiency a secondary consideration for many investors.

Structural Challenges for Value Investing

The diminishing relevance of value investing is not merely a function of performance but also of structural market shifts. The AI revolution has redefined corporate earnings trajectories, favoring companies with scalable, intangible assets over those with traditional, asset-heavy models. As stated by Invesco, momentum strategies thrive in environments where economic optimism and policy shifts drive sustained price trends. Conversely, value strategies-often reliant on cyclical sectors like industrials and exporters-struggle to capitalize on these dynamics unless macroeconomic conditions normalize.

Moreover, the volatility of momentum strategies has introduced new risks. While U.S. momentum funds benefited from the Federal Reserve's rate cuts and easing trade tensions in Q3 2025, the latter half of the year saw sharp corrections in high-flying stocks like Nvidia and Tesla, causing momentum ETFs to underperform. This volatility highlights the fragility of momentum-driven returns, yet it has not deterred investors from favoring growth over value.

Conclusion: A New Paradigm for Factor Investing

The 2025 market regime has cemented the primacy of growth and momentum factors, with value investing relegated to a niche role. While value strategies retain theoretical appeal-particularly in a potential market rotation-practical challenges, including AI-driven earnings growth and structural cost inefficiencies, have eroded their relevance. For investors, the lesson is clear: in an era defined by technological disruption and macroeconomic uncertainty, adaptability to dominant factors may outweigh the allure of traditional value principles.