Politicians from both sides of the aisle have started to sound
a more optimistic tone regarding the chances of avoiding the
fiscal cliff. Investors would do well to remember that what
politicians say, and what comes to fruition, are often two
different things. That and the fiscal cliff, the GDP-sapping
scenario in which old tax reductions expire becoming new tax
increases, will arrive in January unless a deal is hammered out
before year-end.
While there has been no shortage of ideas regarding which
stocks and
ETFs are to be avoided
under the fiscal cliff, one market capitalization spectrum might
help investors endure the worst-case scenario: Mega-caps.
There is no hard and fast definition on market value
constitutes mega cap, but many analysts and investors believe it
is anything north of $100 billion. Running to mega-caps has
worked this year. As iShares Global Chief Investment Strategist
Russ Koesterich notes, "during the first 10 months of the year,
US mega caps gained 13% versus 11.5% for mid caps and 10% for
small caps."
The good news for investors looking to get involved with
mega-cap ETF such as the iShares S&P 100 Index Fund (NYSE:
OEF
) is that, despite the outperformance, mega-caps are still
cheaper than large, mid and small-caps, according to
Koesterich.
"Currently mega caps are trading at 13x trailing earnings
versus 14x for large caps, 18x for mid caps, and nearly 20x for
small caps. In addition, mega cap companies remain the most
profitable segment of the market, with a return on earnings of
23,"
Koesterich wrote in a blog post
.
OEF has gained almost 11 percent year-to-date compared to a
gain of 10.2 percent for the SPDR S&P 500 (NYSE:
SPY
). The ETF's top-five holdings are Apple (NASDAQ:
AAPL
), Exxon Mobil (NYSE:
XOM
), General Electric (NYSE:
GE
), Microsoft (NASDAQ:
MSFT
) and Chevron (NYSE:
CVX
).
The more internationally-focused iShares S&P Global 100
Index Fund (NYSE:
IOO
) has returned 5.4 percent this year. About half of that fund's
country weight is ex-U.S. with the U.K., Switzerland and Germany
combing for nearly 30 percent of the ETF's weight. Exxon, General
Electric, Microsoft, Chevron and International Business Machines
(NYSE:
IBM
) are IOO's top-five holdings.
"Given the environment, perhaps the most compelling reason to
consider an overweight is that mega caps, along with large caps,
have historically been more resilient to slowing domestic growth
than small and mid cap companies," wrote Koesterich.
Other mega-cap
ETFs
to consider include the First Trust Mega Cap AlphaDEX Fund (NYSE:
FMK
). The median market capitalization of FMK's holdings is $56.7
billion, but the fund looks cheaper on a valuation basis than
OEF. OEF has a price-to-earnings ratio of 18.09 and a
price-to-book ratio of 4.01. FMK's P/E is 12.86 and its
price-to-book ratio is 1.69,
according to First Trust data
.
FMK is highly allocated to discretionary names as Ford (NYSE:
F
), Comcast (NASDAQ:
CMCSA
) and Home Depot (NYSE:
HD
) are the fund's top-three holdings. Overall, the discretionary
sector accounts for almost a quarter of FMK's weight.
The Guggenheim Russell Top 50 Mega Cap ETF (NYSE:
XLG
) should note be overlooked, either. XLG tracks the Russell Top
50 Index and has gained 10.9 percent this year, meaning of the
ETFs highlighted here, XLG is the second-best performer behind
only OEF.
For more on ETFs, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.