The Case for Large-Cap ETFs | ETF Trends

For investors seeking exposure to shares and are currently underweight in stock, and are also seeking some risk control, large-cap exchange traded funds (ETFs) can give diverse exposure while targeting this asset class.

The latest sell-off may be a buying opportunity for those investors who are underweight in stocks, especially as the Treasury market sends warning signs. Small-cap funds have seen about $12 billion of inflows while large-caps have seen about $45 billion in outflows, thus presenting an opportunity for buying large-cap ETFs. [All About the S&P 500.]

Michael Rawson for Morningstar reports that based on the thesis that small-cap stocks are expensive relative to large-cap stocks, risk-averse investors who are underweight stocks might want to put money into large-cap funds while investors who are overweight small-cap stocks might want to reallocate money away from small caps and into large caps. [5 ETF Strategies for Investors.]

Here are some other points illustrating the case for large-cap ETFs now:

  • Large-cap companies tend to have wider economic moats and greater exposure to faster-growing international markets, and they are more likely to get a lifeline from the federal government, should trouble present itself.
  • Based on Morningstar indexes, over the past 10 years, large-cap stocks have lost 2.7% per year while small caps have gained 4.8% per year. This outperformance of small caps has caused them to look more expensive relative to large caps.
  • On a price/earnings basis, small-caps currently trade at about 15.6 times earnings while large caps trade at about 14.1 times earnings. Thus, small-caps trade at about an 11% premium to large-caps, a wide spread.

Of course, once you decide to invest in a large-cap ETF, or a few, do so with a solid strategy in place. ETFs are great tools to help investors slide seamlessly into and out of particular market segments when the time is right. [How to Follow Trends.]

For more stories about large-cap ETFs, visit our Large-Cap category.

  • iShares S&P 500 Index (NYSEArca: IVV)
  • iShares Russell 1000 Index (NYSEArca: IWB)
  • SPDR S&P 500 (NYSEArca: SPY)
  • Vanguard Total Stock Market (NYSEArca: VTI)

Tisha Guerrero contributed to this article.

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.