essays pieces of the puzzle
Saturday, July 7th, 2012
tightly bunched

I was very surprised when I saw this chart.  It shows the ETFs for the four Russell indexes along the large/small and growth/value divides.  At less than two percent, this is by far the smallest spread from best to worst among these ETFs for any January through June period since they have been in existence.

The spreads have normally been around five percent, but there were four times it was substantially wider.  In the first half of 2009, which included the climax of the price declines from the financial crisis, small growth (IWO) and large growth (IWF) each produced attractive gains, while small value (IWN) and large value (IWD) had minor losses.  The spread from top to bottom was 16.4%.

Tellingly, the three other times when first-half returns produced spreads in the double digits, they all featured small value as the best and large growth as the worst, with spreads of 10.9% (2006), 27.8% (2002), and 26.2% (2001)!

Even though these are only half-year numbers in each case, they are part of a monumental change shown in the bonus chart below, which plots the returns on the four Russell ETFs since the inception of the most recent one.

The next time someone tells you that valuation doesn’t matter, give them that chart.  The historic over-valuation of growth over value and large over small in the late 1990s was the precursor to the subsequent differential returns.  (Charts:  Bloomberg terminal.)

This is the sixth (and last) in a series of postings that looks at the performance of popular U.S. ETFs during the first half.  #1 ~ Asset classes: SPY, VEU, AGG, and DBC.  #2 ~ Commodities:  GLD, OIL, CORN, JJC, and DBC.  #3 ~ Fixed income: LQD, HYG, TLT, TIP, MUB, MBB, and SHY.  #4 ~ Foreign markets:  EWG, EWJ, EWU, EEB, and EWP.  #5 ~ S&P sectors: XLK, XLF, XLE, XLU, and SPY.