Market Pulse: A look at the style index rotation
Is it better to be a value investor or a growth investor?
Last year growth indexes nearly doubled the performance of value indexes, but in 2016 value beat growth by a wide margin. Instead of being locked into one philosophy, it is best to employ a strategy that allows investors to rotate to whatever style is working.
When growth outperforms value like last year and early this year, hold a growth ETF like PowerShares QQQ Trust (QQQ). Once value outperforms, then switch to an ETF like iShares S&P 500 Value (IVE). Similarly, when small-cap stocks lead then hold a small-cap ETF, but when large-caps do better then switch to a large-cap ETF.
Rotating to the leading market segments is what my style index rotation model is all about. I’ve published this mechanical model in my two ETF trading books, ETF Trading Strategies Revealed and Exchange Traded Profits, both of which are available at the Washoe County Library.
How do you know what segments are leading? Each weekend I post relative strength rankings for style index ETFs, sector ETFs, and Fidelity Select mutual funds free-of-charge on the Analysis page of http://www.ETFtradingstrategies.com.
The ranking uses ETFs from the iShares family because they cover all the style index choices, ranging from large-cap growth to small-cap value. Buying these or other ETFs should only cost about $5 a trade. Since my client money resides at Charles Schwab, I often use Schwab ETFs since they trade commission free.
Trading style index ETFs allows investors to gain well-diversified exposure to a specific area of the market and gives investors the flexibility to quickly move from value stocks to growth stocks, or from small-cap stocks to large-cap stocks. By owning the better performing ETFs (top half of the relative strength ranking) an investor can outperform.
Which market segment will outperform in 2018? Large-caps are beating small-caps and growth is outperforming value so the PowerShares QQQ is a good holding. Emerging markets are stronger still, so I own iShares Emerging Markets (EEM).
With style index exchange-traded funds (ETFs), it is easy to switch from holding large-cap stocks to small-cap stocks, or switch from growth stocks to value stocks. By rotating to the best performing ETFs, one can significantly outperform those that limit themselves to one trading style.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www. VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.