Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Get Outside the Equity Style Box with ETFs

Companies / Investing 2010 Jun 17, 2010 - 08:33 AM GMT

By: Ron_Rowland

Companies

Best Financial Markets Analysis ArticleYou’ve likely heard these investment buzzwords on TV or read them in the business section of your newspaper: Buy small-cap value! Look for opportunities in mid-cap growth! Go to large-caps for safety!

So you may be asking: What are they talking about?


Today I’m going to take the mystery out of these terms — and then explain why your best chance for profit may actually be in none of these categories. Sometimes it’s better to think outside the box.

Unpacking the Style Box …

Stocks can be sorted and categorized in many ways. The most common is by size, or “capitalization,” which means the number of outstanding shares times the share price. Relatively big companies are considered “large-cap,” smaller ones are “small-cap” and those in between are “mid-cap.”

You can also group stocks according to their fundamental characteristics …

“Growth” stocks are expanding businesses. People buy them because they think the above average growth of the company will translate into a higher stock price soon.

“Value” stocks are different … the shares might not be going anywhere, and may even be falling.

People who buy value stocks are looking for a bargain. They think the stock is really very valuable and will go much higher once the rest of the world sees the light.

Then, of course, there are stocks that lie somewhere in between growth and value. We call these the “blend” stocks.

Morningstar, the well-known research firm, invented the “Style Box” to categorize mutual funds according to the type of stocks in their portfolios. It looks like a 9-square checkerboard. The vertical axis indicates the size (large, mid, or small) and the horizontal axis is the risk style (value, blend, or growth).

What you get is nine different boxes, or categories:

The Style Box has nine different squares.
The Style Box has nine different squares.
  • Large-cap value
  • Large-cap blend
  • Large-cap growth
  • Mid-cap value
  • Mid-cap blend
  • Mid-cap growth
  • Small-cap value
  • Small-cap blend
  • Small-cap growth

Equity investment managers tend to specialize in one or two of these categories. And investors often try to diversify their holdings by making sure their portfolio is exposed to all nine boxes.

There is, of course, a fair amount of wiggle room in exactly where you draw the lines …

That’s because stock analysts have different standards for what constitutes each category, such as “value” or “small-cap.” Therefore, not every style-based exchange traded fund (ETF) looks alike. Nonetheless, there is a broad consensus: Funds in any given category tend to be highly correlated with each other.

The Extreme Edges of the Box …

Now you’re probably asking, “Ok, Ron, which category is your favorite?” The answer is “All and none.” I’m a trend-follower — so I look for the trends and try to follow them. And at one time or another, I’ve liked ETFs from all the style categories.

However, there’s more to stock investing than the Style Box. Sometimes you want to look outside the grid by going to the extremes of each axis.

Consider size …

ExxonMobil is a top mega-cap stock.
ExxonMobil is a top mega-cap stock.

The three large-cap style boxes represent the average capitalization of all the stocks held by the funds in those boxes. As you move to the lower end of the box you will eventually move into mid-cap territory. But what if you move the other direction?

There are large-cap stocks and then some SUPER-large cap stocks …

When you reach the upper edge of the large-cap style boxes you have arrived at the biggest of the big. Sometimes they’re called “mega-caps.” These are the multinational oil companies, banks and other huge firms that operate on a global scale.

There are relatively few of these companies, but they account for a relatively large portion of overall market capitalization.

A couple of ETFs that truly represent this group for U.S. stocks are:  

  • iShares S&P 100 Index Fund (OEF) and
  • Rydex Russell Top 50 (XLG).

For global mega-caps there’s:

  • SPDR Dow Jones Global Titans (DGT) and
  • iShares S&P Global 100 (IOO).

It is also possible to get mega-cap ETFs in value and growth flavors from iShares and Vanguard.

At the extreme bottom of the Style Box are “micro-cap” stocks: Companies too tiny to qualify as small-cap but still worthwhile.

My favorite ETF covering this group is iShares Russell Micro Cap (IWC) because it is the most liquid, and it tracks the most widely followed benchmark.

Others to consider are:

  • PowerShares Zacks Micro Cap (PZI) and
  • First Trust Dow Jones Select Micro Cap (FDM).

As for growth vs. value, you can go to the extremes on them, too. And when either style is in favor it often makes sense to go to the extreme version of that style.

Several ETFs tighten the criteria and get rid of the mushy middle, leaving you with a smaller number of stocks that are super-growth or super-value. For instance, Rydex has a family of six “pure growth” and “pure value” ETFs — holding stocks that are at the extreme left and right edges of the style box.

Am I saying all these funds are a good buy now? Of course not.

Recently, however, some of my indicators are starting to show a shift in momentum away from the riskier small-cap and mid-cap groups in favor of some of the large-cap and mega-cap ETFs named above.

And I think it’s a trend worth watching to see if it gains traction over the next few weeks.

Best wishes,

Ron

P.S. Are you on Twitter? If so, please follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in