Market Pulse: Style index rotation — what it all means
June 4, 2014
This year the S&P 500, a measure of large-company stocks, is up about 4 1/2 percent while the Russell 2000, a measure of small-company stocks, is down 1.7 percent. Large-cap stocks are performing better than small-cap stocks. That isn't always the case.
Looking more closely, small-cap value indexes are about unchanged in 2014 while small-cap growth indexes are down 3.3 percent. Value investing is performing better than growth investing. The opposite was true last year.
Instead of being locked into one market segment, it is best to employ a strategy that allows the investor 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).
Rotating to the leading market segments is what my style index rotation model is all about. I've published this model in Stocks & Commodities magazine, which is available in the lobby at 889 Alder Ave.
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.
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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.
I trade client money through Schwab so I often use Schwab ETFs because 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.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.