Tahoe Market Pulse: The ins and outs of style index rotation
This year the S&P 500, a measure of large-cap stocks, is unchanged. Mid-cap and small-cap indexes are also flat. There is a big difference in returns, however, when you look at growth indexes versus value indexes.
Through Monday, the iShares Large-Cap Growth ETF (IVW) was up 6.1 percent while iShares Large-Cap Value (IVE) was down 3.9 percent.
Along the same lines, iShares Small-Cap Growth (IJT) was up 4.6 percent while iShares Small-Cap Value (IJS) was down 5.4 percent. So depending on which style index box you are in, your portfolio is either up, down, or treading water.
Instead of being locked into one market segment, equity investors should employ a strategy that allows them to rotate to the best-performing area.
When large-cap stocks are leading, then hold an S&P 500 index fund. Once small-cap or mid-cap stocks lead, however, switch to a mid-cap or small-cap Exchange-Trade Funds (ETFs).
The same concept holds true for growth investing and value investing. Rotating to the leading market segments is what my style index rotation model is all about.
Specific details on this model is found in my two trading books, which are at the Washoe County Library.
How do you know what segments are leading? Each weekend I post a style index ranking 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.
Rotating to different style index ETFs allows investors to gain diversified exposure to a broad segment of the market while having 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. That’s increasingly important in a go-nowhere market.
David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.