Mega capitalization-weighted stock exchange traded funds may be slower moving, but the asset class category has helped investors capture market returns with lower volatility.
“Mega-cap stocks have different risk and return characteristics than mid- and small-cap stocks,” according to Morningstar analyst Michael Rawson. “Mega-cap stocks tend to be mature industry leaders or globally diversified conglomerates with sustainable competitive advantages and international reach. While mega-cap stocks individually may have lower risk than small caps, they may also have lower growth potential.”
For instance, the Guggenheim Russell Top 50 Mega Cap ETF (NYSEArca: XLG) singles out the biggest U.S. company stocks, with a combined market cap of $209 billion, taken from the the Russell 1000 large-cap index.
Additionally, ETF investors can choose from other options, including the Vanguard Mega Cap ETF (NYSEArca: MGC), which may include more large-cap exposure; iShares S&P 100 ETF (NYSEArca: OEF), which follows 100 of the largest stocks with a liquid options market; and the SDPR Dow Jones Industrial Average ETF (NYSEArca: DIA), which tracks the Dow Jones Industrial Average of 30 blue-chip stocks. [Mega-Cap ETFs for an Attractive Play on the Market]
Rawson pointed out that holding a targeted asset class category ETF rather than separate size-segment funds can lower turnover. Additionally, investors may utilize the mega-cap ETFs to better control a stock portfolio’s market exposure or for short-term tactical plays.
However, Rawson warned that mega-cap ETFs may not provide too much diversification from some benchmarks. For instance, the Russell Top 50 Mega Cap Index, the underlying index for XLG, is almost perfectly correlated with the S&P 500 over the past 14 years.
Over the past 14 years, the Russell Top 50 Mega Cap has fallen behind the Russell 2000 index of small-cap stocks by an average 3.3 percentage points per year, The index, though, may offer cheaper valuations as it is now trading with a price-to-earnings ratio of 18 times, compared to 21 for the Russell 2000. Looking ahead, analysts expect a 9% earnings growth for the Russell Top 50 Mega Cap Index, compared to the 12 growth for Russell 2000 stocks.
While mega-caps may show slower growth, the asset category also come with lower volatility. Specifically, the Russell 50 Top Mega Cap Index has a standard deviation of 13.8% over the past 10 years, compared to a 19.5% deviation in small-cap stocks.
“This may be because mega-cap companies tend to be better diversified and are more likely to enjoy sustainable competitive advantages than smaller companies,” Rawson added.
Guggenheim Russell Top 50 Mega Cap ETF
For more information on the markets, visit our current affairs category.
Max Chen contributed to this article.