Large-cap exchange traded funds (ETFs) make up the core of many investor portfolios. These companies are, by and large, household names. They’re major corporations that do business around the world. What can they do for you and your clients? Read on.
What Are Large-Caps?
Stocks worthy of the large-cap status usually have market capitalizations exceeding $10 billion, with a long, stable operating history and a copious amount of cash readily available, which also makes large-caps less risky than their small- and mid-cap counterparts.
Different index providers define large-cap stocks differently. For instance, the S&P considers companies with market capitalizations of $4 billion or more as “large cap,” while Dow simply includes the top 750 largest corporations in its Dow Jones Wilshire U.S. Large-Cap Index.
Large-cap companies are also multinational companies that have branched out to different countries, generating additional revenue and earnings from overseas ventures. This aspect provides investors some geographic diversification. McDonald’s (NYSE: MCD) is a recent example: despite depressed consumer spending levels in the United States, McDonald’s has been able to maintain sales growth through its presence in emerging markets.
The most widely-followed benchmark is the S&P 500, an index that follows the 500 largest publicly-traded U.S. companies. ETFs track this benchmark index, along with other prominent domestic and international indexes. Investors tend to follow the S&P or the Dow Jones Industrial Average for a sense of how large-caps are faring.
The Benefits of Large-Caps
Investing in large-caps has many advantages. But before we get to that, it’s important to talk about one thing: large-caps are generally not growing companies. If you’re looking for explosive growth in a large-cap stock or ETF, it generally won’t be found. Most large-caps tend to reach a point where they’ve gotten so big that more growth doesn’t come as quickly.
Here are some of the reasons large-caps are beneficial:
- They can drive the economy. If you’ve ever wondered why everyone watches the S&P 500 and the Dow, it’s because those indexes hold the largest publicly traded companies in the United States. How they’re doing tends to be a signal of how the broader economy is faring.
- They pay dividends. Because many large-caps aren’t busy reinvesting their profits into yet more growth, they may use that extra cash to pay their investors. An attractive dividend can help bring more investors and, in turn, drive up the share price.
- They offer stability. Large-caps are companies that have arrived, so to speak. Their movements are more predictable, which makes them attractive to investors who don’t want to take on a lot of risk.
What to Look For
When looking for ETFs that give large-cap exposure, many of the basic considerations that you would have for any ETF would be the same here: trading volume, assets under management, expense ratio and weighting of holdings should all be factors to think about.
Digging deeper, though, there are other things to think about.
ETFs that track large caps also come with different portfolio strategies. For example, funds may be traditional market-cap weighted, equal weighted for every stock in the index, fundamentally weighted based on earnings or dividends, or rules-based quantitative investing, which entails picking stocks based on P/E ratios or other quantitative strategies.
In addition, large-cap ETFs also come in leveraged and short strategies that let investors bet against or increase exposure to an index.
Short-term traders utilize large-cap ETFs because of their highly liquid nature, buying and selling the funds often on tight spreads. Long-term investors find them attractive because of dividends and stability.