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Q & A

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Is ISI a Good Surrogate for the Value Line Index?

By Arthur B. Hill - Thu 17-Aug-06 9:02 AM EDT

Question: I follow the Value Line Geometric composite very closely. Since there is no ETF that uses this as the basis for investment, I use the S&P 1500 iShares (ISI). What do you think? Is this reasonably close, or can I get closer?

Answer: The S&P 1500 iShares (ISI) is weighted by market capitalization. This means that the largest stocks will carry the most weight. In fact, the top 100 stocks make up around 48% of the index. The remaining 1400 stocks must divvy up the other 52% of the index. The top 500 stocks make up 88% of the index and this leaves just 12% for remaining 1000 stocks. The remaining 1000 stocks are small and mid cap companies that weigh relatively little in this index. The S&P 1500 iShares (ISI) is clearly geared towards large-caps.

In stark contrast to the S&P 1500 iShares (ISI), the Value Line Geometric Index ($VLIC) is an equally weighted index. That means the largest company carries the same weighting as the smallest company. Small-caps and mid-caps make up the majority of this index and it would make sense to use a small-cap index for comparison.

This chart shows the Russell 2000 iShares (IWM), the Value Line Geometric Index ($VLIC) and the S&P 1500 iShares (ISI). These three were pretty closely correlated from October to May. However, the correlation broke down in July and August. VLIC moved below its June low in July, but ISI held above its June low as large-caps held up better. In addition, ISI moved above its July high in August, but VLIC remains below its July high as small-caps lagged. The Russell 2000 iShares (IWM) also remains below its July high and more accurately tracks the Value Line Geometric Index ($VLIC).

Russell 2000 iShares (IWM) Breadth Chart (click here).

S&P 1500 iShares (ISI) Breadth Chart (click here).

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