Is Bigger Better? The Pros and Cons of Mega-cap ETFs

Considering large caps have outperformed small and mid-cap stocks recently, investors might want to look at "mega-cap" stocks for their exchange traded fund (ETF) portfolio. Megacaps generally have a stock-market value of at least $50 billion. Although their gains are generally smaller than large-cap stocks, mega-cap stocks tend to remain steady through rough market times, according to Eleanor Laise for The Wall Street Journal. Another benefit of mega-cap ETFs is that they tend to charge lower fees than typical ETFs. Some easy ways to access mega-cap stocks include:

• DIAMONDS Trust, Series 1 (DIA)
• SPDR DJ Global Titans (DGT)
• iShares S&P Global 100 Index (OEF)
• Rydex Russell Top 50 (XLG)

However, be careful to ensure you don’t have overlapping megacaps in your portfolio. This can easily happen because the same huge companies within mega-caps are already within many ETFs. To avoid double exposure, investors might want to trade their traditional ETF that tracks the S&P 500 for one that tracks the S&P 100. In addition, mega-cap ETFs pose the risk that when one stock suffers within the ETF, it can greatly affect the overall ETF’s performance. This is because mega-cap ETFs tend to be more concentrated in top holdings than their broader large-cap competitors.

For full disclosure, some of Tom Lydon’s clients own DIA.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.