The American philosophy of “bigger is better” has taken over the fast food industry, the electronics industry, the automotive industry and could soon be making its way to the exchange traded fund (ETF) industry.
Many investors are turning to “mega-cap” stocks. For those of you who haven’t heard of this term, it covers companies who have a market capitalization of $50 billion or more.
Bryan Keller of Seeking Alpha states the following reasons why these stocks are attractive to investors:
- They are household names, are the most recognizable stocks to the general public and information on them can be found just about anywhere
- They have very attractive valuations when compared to small-cap or mid-cap stocks
- Have stable business models and are not pressured to expand or get their hands on the next big innovation
- Many of these companies are self-funding, meaning they don’t need to issue debt or additional stock to fund the business – stability lures the average investor in
- Current crisis notwithstanding, they’ve shown a past ability to weather an economic downturn, challenged but intact
Bigger is not always necessarily better. I don’t know about you, but a super-sized value meal at McDonalds (MCD) doesn’t seem like a good thing to me, and I don’t know how many people really need that 108-inch television in their living rooms. And another thing: few have been immune from the economic downturn – and that includes large caps. Bank of America (BAC), Microsoft (MSFT), JP Morgan (JPM) and other mega companies have all taken serious hits lately.
Also be sure to know what you own when looking at large-cap ETFs, because although they’re diversified, many of them have weightings in financials, a sector many investors might be leery of for the time being.
Large caps have been beaten up as of late, though – watch the trend lines if you’re looking for opportunities. If you do want to grab some exposure to the big boys of the capitalization world, here are a few ETFs to take a look at.
- Vanguard Large-Cap ETF (VV): Follows the top 750 U.S. large-cap stocks; top holdings are Exxon Mobil (XOM), 3.7%; General Electric (GE), 2.3% and Microsoft, 2%.
- iShares S&P 500 (IVV): tracks the same index as the SPY, down 4.92% over the last month; top holdings include Exxon Mobil, 5.2%; Procter & Gamble (PG), 2.4% an General Electric, 2.2%.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.