Switching Between U.S. Market Cap Style Subclasses: Benefits and Limits

by: MyPlanIQ

In previous articles we have examined the impact of switching between different asset subclasses (for example from large cap blend to small cap growth) in terms of added returns.

An article published in the Journal of Asset Management (May, 2007) concluded that active multi-style rotation strategies can be devised to outperform the best performing buy-and-hold portfolio. Other articles have reached similar conclusions.

MyPlanIQ has set up and manages a portfolio of ETFs that represents each subclass in U.S. equities, and we are going to examine its performance to determine the benefit from rotating subclasses versus having the whole market.

The portfolio has ETFs for each subclass and they are listed here:



Russell Smallcap Value


Russell Smallcap Index


Russell Smallcap Growth


Russell Midcap Value


Russell Midcap Indedx


Russell Midcap Growth


Russell Largecap Value


Russell Largecap Index


Russell Largecap Growth


Every month the portfolio picks the ETF with the highest trend score. (The trend score is the average of 1,4,13,26 and 52 week total returns - including dividend reinvested.)

It is possible to hedge a little by selecting the top two, but for this exercise, we are just selecting one.

Performance Data

Name Last 1 Year Last 3 Years Last 5 Years
P Momentum Scoring Style ETFs 20% 0% 1%
VFINX (Vanguard (S&P 500) Index) 15% 0% 2%
VBINX (Vanguard Balance (60% stocks/40% bonds) 11% 3% 4%

If we take VFINX to represent the market we see that over five years this doesn't beat the market.

We would expect VBINX to beat an all U.S. equities portfolio over the longer term but we would have expected the portfolio with styles rotation to beat the market by a little.

If we take a longer timeframe, we can see that styles rotation does have benefits.

Click to enlarge


In the longer term, rotating subclass funds into a portfolio increases returns. Over the past five years, the results have been equivocal although 2010 was a year when the results were good.

The past five years have been unusual in terms of market dynamics and the future is no more certain, so this is only of interest to the investor with a long term view.

This is a simple. Pick just one approach and the results may be improved with picking the top two funds - this can be examined in a future article.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. MyPlanIQ does not set up plans. The performance data of portfolios mentioned above are obtained through historical simulation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.