If the dollar remains weak and the markets stay depressed, large-cap exchange traded funds (ETFs) are poised to be sitting pretty.
That’s according to Neil Michael, head of quantitative strategies for SPA ETFs. “I suspect that they will outperform small- and possibly mid-caps, as well.”
Growth in the United States 2008-2009 is going to be below-trend. The tendency for large-cap ETFs to have greater international exposure will work in their favor, Michael says.
Over the last six months, mid- and small-caps have been outperforming the large in all three of the blend, growth and value categories. Large caps, in turn, are down 8.6% for value, 4.9% for blend and 1.4% for growth.
But thanks to slower growth, large-caps are in a position to deliver numbers, says Michael. “Large caps will benefit because the dollar is the weakest they’ve been in decades. That’s a massive competitive boost to U.S. equities and multinational companies, which tend to be large caps.”
Even if the dollar did improve overnight, the effects wouldn’t be seen for a couple years as far as large-caps are concerned, he says.
In 2005, Michael points out, the GDP deficit was 6%. The number has slowly improved to 4%, and companies are benefiting – particularly the large caps.
“If you look at the top 25 stocks by market cap, more than 40% of their sales come from overseas. The dollar is cheap, and emerging markets are continuing to grow very rapidly.”
On their own merits, they look good, but when large-caps are compared with bonds, they look even more attractive. “Dividend yield on the S&P is at reasonably historic highs and bond yield is historically low. The S&P looks attractive relative to bonds,” says Michael.
Michael acknowledges that so far, small-caps have been outperforming at historic extremes. “But if you look on a long-term basis relative to large-cap, the gap starts to close. It’s what we’ve started to see in the last six months to a year.”
He believes this gap is only going to continue to close further.
The size of the large caps, coupled with their high visibility in the marketplace, are going to continue to draw investors toward them as the markets remain volatile.
“People are looking for visibility and stability, and you tend to get that more from large-caps than small-caps,” he points out.
SPA MarketGraders listed in the United States in October of last year. Their funds are constructed by a quant model.
- SPA ETF Market Grader Large Cap (SZG), down 13% year-to-date
- iShares S&P 100 Index Fund (OEF), down 14.4% year-to-date
- SPDR S&P 500 ETF (SPY), down 13.4% year-to-date
- Vanguard Large cap ETF (VV), down 12.5% year-to-date
- PowerShares QQQ (QQQQ), down 12.9% year-to-date