Description

There are very few "no-brainers" this year as we stuggle to gauge the impact of a slowing economy. But I think every VIC member would agree that value will triumph over growth in the current environment. I argue that this is especially true in the small-cap arena (Russell 2000), where the value companies have been particularly out-of-favor and the growth companies are in sorry shape.

We can capture this as a trade thanks to the good folks at Barclays Bank, who have introduced the "I-shares" AMEX-traded funds.

Buy IWN - I SHARES RUSSELL 2000 VALUE
Sell 2 IWO - I SHARES RUSSELL 2000 GROWTH

Good entry point right now. If you are able to chart these together, you will see about 12 months of steady outperformance of the IWN from March 00 to March 01. Then, in the big April-May 01 bounce 2IWO made about a 15% relative comeback. Now I submit that IWN will resume its dominance, probably for the balance of the year with a target profit of 20% on a dollar-neutral position, plus some short rebate and a modest positive dividend carry.

Furthermore, I expect the June 30th Russell rebalancing to positively impact this trade because value members will generally be up-weighted creating near-term buy pressure and vice versa with respect to growth members.

Liquidity. Though the daily volume on IWO and IWN is rather low, there is always a 50,000 share AMEX bid and offer, usually with a spread of about 50 basis points. This creates an optimal situation that discourages day-traders, but suits our purposes well.

Other. There is a tremendous amount of information available on www.russell.com relating to index membership and weightings. You will see that these are true indexes with no member weigthing greater than 2%.

As our VIC founder has been known to say, the best ideas are often the simplest, requiring neither advanced degrees nor sophistcated analytics.

Catalyst

Value beats growth in this market . . . you know it. Near-term Russell rebalancing.