In an early post I showed that we can use ETF rankings to gain insight on where we are in a business cycle by mapping it to the Sector Rotation road map. I found another road map of Growth vs. Value on Interactive Investor's blog, of which I can make similar use.
The research was carried out by Morgan Stanley. It states that value stocks will outperform during early stage recovery and mid-stage bull market, growth stocks will outperform during mid-stage bull market to peak of bull market, then in bear market, balance sheet will outperform till the bottom. Although I'm not aware any ETFs representing balance sheet, there are value ETFs and growth ETFs. Because a highly ranked ETF will outperform the market, we can use this predictive power to learn where we are in the business cycle.
I select iShares growth and value ETFs: IWD, IWF, IWN, IWO. Their ranks are listed below:
- IWO, Russell 2000 Growth Index ETF: 63.19
- IWF, Russell 1000 Growth Index ETF: 58.54
- IWD, Russell 1000 Value Index ETF: 44.77
- IWN, Russell 2000 Value Index ETF: 42.21
Clearly growth is more fundamentally attractive than value at this moment. According to the chart, probably we are in the late stage of a bull market. This matches with the conclusion in our ETF ranking and sector rotation post.
To understand when we will be in a bear market, it would be handy to have an ETF represent balance sheet. If its rank is higher than growth ETFs, then highly likely we are at the beginning of a bear market. If you know a good balance sheet ETF, please let me know.