Despite recent headwinds emanating from budget battles and the
debt ceiling debate, the stock market is still near its all-time
high. In addition to the drama in Washington, the
uncertainty relating to Fed's policy is likely to keep the market
range-bound in the coming days.
The Fed surprised the market by announcing 'no-taper 'after it's
recent FOMC meeting but the fact remains that tapering has just
been delayed; it is not off the table. (Read:
4 Unbeatable ETF Strategies for Q4
This year, the rally has mostly been led by small-cap stocks,
particularly in the past few months. As the US economy appeared
to have better outlook than many international markets, investors
poured a lot of money into smaller, domestically focused
companies. Easy money further encouraged investors to invest in
higher-risk, higher growth stocks.
After the recent run-up, smaller-cap stocks appear rather
expensive compared to their larger-cap cousins. Further, the
Euro-zone has finally emerged out of its long recession, Japan
seems to be rebounding and the Chinese economy also shows clear
signs of picking up, though growth in some other emerging markets
Large-cap companies will benefit from the brightening global
growth environment, even though currency volatility will remain a
bit of a concern for them. Most of these companies have huge cash
piles on their balance-sheets and are likely to return more cash
to shreholders via dividends and buybacks, going forward. (Read:
3 ETF Winners from No Taper Shocker
Further, per iShares
, while smaller companies perform better during an accommodative
monetary period, large- and mega-cap companies outperform
in the higher real interest rate environment. The following
chart shows that small-cap valuations relative to those of
large-cap declined as real interest rates rose.
Another reason for investing in larger companies now is that many
investors who have either continued to invest in bonds or stayed
on the sidelines will begin to embrace stocks when they finally
realize that the bull market in bonds is over. Being very risk
averse, these investors tend to favor larger, stable, well-known
companies over smaller riskier players. (Read:
No Taper, No problem for these dividend ETFs
It may be thus be the right time to invest in some of the largest
and the best known companies that not only look attractive on
valuation basis but are also poised to outperform as the global
economy recovers and interest rates in the US trend higher.
Below we have analyzed three ETFs that invest in mega-cap
companies--usually defined as having market cap above $100
billion. These are large, stable companies that generate solid
cash flows and add stability to the portfolios. Most of these
companies have sustainable competitive advantages and
fortress-like balance sheets, which ensure long-term success.
iShares S&P 100 ETF (
OEF is the largest fund in the space with over $3.9 billion in
assets. It tracks the S&P 100 index, and holds 100 largest US
companies, with an average market cap of $157.7 billion.
Top holdings include Apple, Exxon Mobil, GE, Microsoft and
J&J. In terms of sector exposure, Information Technology,
Financials, Healthcare and Energy take the top four spots. The
product charges an expense ratio of 0.20% and has a dividend
yield of 2.1% currently.
Vanguard Mega Cap ETF (
MGC follows the CRSP US Mega Cap Index, which is comprised of
largest U.S. stocks representing approximately the top 70% of
market capitalization. It has an AUM of $927.3 million, which are
invested in 293 holdings.
The fund is pretty diversified in various sectors, with biggest
allocations to Financials, Technology, Consumer Services and
Healthcare. Top holdings are pretty similar to OEF, with Apple,
Exxon Mobil, Microsoft, J&J and GE in the first four spots.
The product has a very low expense ratio of 12 basis points and
it pays dividends at 2.16% currently.
Guggenheim Russell Top 50 Mega Cap ETF (
XLG tracks the Russell Top 50 Mega Cap Index, which is comprised
of the 50 largest companies in the Russell 3000 Index,
representing about 40% of its total market cap. The fund has
attracted assets of $513.6 million so far.
Technology, Financials, Energy and Healthcare are the top sectors
the fund has exposure to. Top holdings are Apple, Exxon Mobil,
GE, Microsoft and J&J. The product charges expenses of
20 basis points per annum and has a nice dividend yield of 2.63%
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VANGD-MEGA CAP (MGC): ETF Research Reports
ISHARS-SP100 (OEF): ETF Research Reports
GUGG-RUSL TOP50 (XLG): ETF Research Reports
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