Heading into this week's Fed meeting most of the major indices were up for the year. But which asset classes have been the leaders? Large or small? Growth or value? I broke down the market into 9 categories (related ETFs): S&P 500 (SPY), S&P 500 Growth (IVW), S&P 500 Value (IVE), S&P Mid-cap 400 (IJH), S&P Mid-cap 400 Growth (IJK), S&P Mid-cap 400 Value (IJJ), S&P Small-cap 600 (IJR), S&P Small-cap 600 Growth (IJT), and S&P Small-cap 600 Value (IJS).

When it comes to growth versus value, in 2007 there has been no value in investing in value stocks. The growth index in all three categories was the best performers with value the worst. The biggest discrepancy came in the small-cap asset class where the growth index gained 9% as value lost 3%. Of the 9 indices, the small-cap value was the only one in the red.

Most investors would assume value investing to be the safer play in a volatile market, but that is a market myth. In times of volatility and outside issues (credit crunch, housing slowdown, etc.), growth comes at a premium. When the stock market falls it will typically bring down the majority of stocks, however at the end of the day it will be growth that that attracts money. Think about it this way. If a stock continues to grow revenue and earnings and the stock price falls, the valuation will become more attractive and eventually the stock price will catch up with the earnings numbers.

When looking at the market cap of indices, the mid-cap stocks returned 11%, large-cap 6.9%, and small-cap 2.7%. The small-cap stocks have been beating the large-caps on a regular basis over the last few years, but it appears that run is over. Last year the mid-cap index lagged its two peers, but is clearly the best of breed this year.

Heading into next year will the mid-cap stocks continue their dominance or is it time for the large-cap stocks to retake the crown it has been chasing for years? My best guess is that the large-cap and mid-cap stocks are poised to continue their supremacy over the small-cap stocks. Because my view is the market will continue higher, but with volatility, I also feel that growth is a better bet than value. That being said IVW and IJK are my two favorite ETFs in the group. If it makes you more comfortable you can add in the small-cap growth ETF (IJT) for good measure. An equal weighting in all three growth ETFs would have returned 12%, only one ETF bested that (IJK). In the end the reward remains high as the risk is lowered dramatically through investing in three asset classes. Always keep in mind that diversity does not necessarily signify you are lowering your reward potential – the key is asset allocation.