Market Timing  |  JAN 2005

Index Rotation With Exchange-Traded Funds by David Vomund

Stocks & Commodities V. 23:1 (36-38, 45): Index Rotation With Exchange-Traded Funds by David Vomund Which will perform best, large-cap stocks or small-cap stocks? Will value stocks outperform growth stocks or will growth outperform value? If you watch CNBC, you’ll notice that growth managers always say growth will outperform, value managers always say value will outperform, and small-cap managers always say small-cap stocks will outperform. Every analyst has his unique approach, and he believes his style is best. Unfortunately, market environments change. That means there are times when growth outperforms value and vice versa, and times when largecaps outperform small-caps and vice versa. THE STYLE INDEX ROTATION STRATEGY Instead of being locked into one trading style, it is best to employ a strategy that allows the user to rotate to the best-performing market segment. That’s what our style index strategy is all about. The style index strategy trades securities that track various market indexes. These “style” indexes include large-cap growth, large-cap value, small-cap growth, smallcap value, and so forth. While mutual fund families like the ProFunds have funds that track these indexes, the best vehicle for trading style indexes is exchange-traded funds (ETFs), the fastest-growing financial product in the US. First launched in the early 1990s, ETFs are securities that combine elements of index funds, but do so with a twist. Like index funds, ETFs are pools of securities that track specific market indexes at a very low cost. Like stocks, ETFs are traded on major US exchanges and can be bought and sold anytime during normal trading hours.

by David Vomund