McCall's Call: The ‘ABCs’ Of Size And Style

March 10, 2011

Knowing all about size and style can enhance returns and limit losses.


The growth of exchange-traded funds has created opportunities for investors that weren’t available in the past, and yet many people aren’t taking advantage of all the options now available to them in terms of size and style in stock investing.

Matthew D. McCallIndeed, the majority of investors continue to opt for a passive approach to investing by simply buying into an ETF that tracks a major index such as the S&P 500.

This strategy would have worked well if you were lucky enough to buy into the SPDR S&P 500 ETF (NYSEArca: SPY) in March 2009. But even though SPY has almost doubled since the market March 6 low that year, it lags many of its closest competitors. A quick review of size and style is in order.

The universe of stocks in the U.S. can be categorized in a number of ways. One is by market capitalization—the market value of the company based on multiplying share price by the number of outstanding shares. The three categories are large-cap (over $10 billion), midcap ($1 billion to $10 billion) and small-cap ($100 million to $1 billion).

From there, size can be split into style categories that include growth, value and core. Core is a mix of stocks that exhibit both average growth and value characteristics. Stocks in the growth class exhibit above-average growth as compared to their peers, while value stocks are considered inexpensive relative to fundamental comparisons.

To parse differences in returns, I looked at nine ETFs offered by iShares that cover all the sizes and styles I mentioned above. I compared the ETFs against each other during various time frames dating back to the S&P 500’s all-time high on Oct. 11, 2007.

I won’t mention all of them by name here, but you can compare all their returns on the table at the bottom of this story.

Smaller Is Better During A Bull Market

Stocks recently marked the two-year anniversary of a bull market that began in March 2009. From the bottom through the end of February of this year, the S&P 500 rose by an astounding 94 percent.

But of the nine ETFs I looked at, the best performer during that period gained 174 percent, and the worst of the group returned 78 percent. All three of the large-cap ETFs separated by style—value, core and growth—lagged the return of the S&P 500, while the worst of the small- and midcap ETFs returned a minimum of 130 percent.

During bull markets, investors typically become less risk averse and therefore are willing to take their chances on more aggressive styles by choosing growth stocks over slower-moving large-cap value options. Indeed, the iShares Morningstar Large-Cap Value ETF (NYSEArca: JKF) was the laggard, with a gain of 77 percent, while the iShares Morningstar Large-Cap Growth ETF (NYSEArca: JKE) gained 90 percent.

Just as investors often choose growth stocks in the large-cap category during bull markets, some will take the next step to take more risk on a small-cap ETF, versus a large-cap fund.

This tendency is clear in the returns I looked at, with the iShares Morningstar Small-Cap Growth ETF (NYSEArca: JKK) gaining 140 percent.

Oddly enough, the best performer during the two-year bull market has been the iShares Morningstar Small-Cap Value Index Fund (NYSEArca: JKL), which gained 174 percent. An explanation for this might be that a large number of once-high-growth stocks fell so much during the market crash that they essentially became value plays.


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