Active managers are trying to stick out in a slowly moving market by diving into smaller stocks. Consequently, some of the largest stocks and mega-cap exchange traded funds have been ignored and are now trading at relatively cheap valuations.
Bank of America Merrill Lynch strategist Savita Subramanian argues that as active managers try to justify their hefty fees by trading in asset categories with high active shares, more larger company stocks have been overlooked, reports Luke Kawa for Bloomberg.
“[M]aintaining high active share inadvertently forces fund managers into smaller names; so even if a mega cap stock looks attractive, it is hard to be meaningfully overweight without allocating an outsized amount of assets,” Subramanian wrote in a note. “This has created a world where mid-caps are trading at near all time premia to larger stocks.”
For fear of being called out as closeted benchmark investors, active managers have added more smaller, idiosyncratic stocks to prove how “active” they are, reports Michael P Regan for Bloomberg.
Consequently, Subramanian argues that investors should “buy mega cap big old ugly stocks – inexpensive, hard to own, and more out of favor than ever.”
ETF investors who want to to gain exposure to some of the largest U.S. companies can focus on mega-cap ETFs. For instance, the SDPR Dow Jones Industrial Average ETF’s (NYSEArca: DIA), which tracks the Dow Jones Industrial Average, includes a 90.4% tilt toward mega-cap stocks and 9.6% in large-caps. DIA includes prominent brands like Goldman Sachs (NYSE: GS) 7.5%, International Business Machines (NYSE: IBM) 6.3%, 3M (NYSE: MMM) 5.9%, Boeing (NYSE: BA) 5.4% and Apple (NasdaqGS: AAPL) 4.8%.