Mega Cap ETFs: Is Bigger Always Better?
At the core of many investor portfolios is an allocation to large cap domestic equities. Because large cap stocks generally have long operating histories, established customer bases, and sufficient cash on hand, they are perceived as the least risky of equity investments, strongly correlated with mid cap and small cap stocks but less volatile than smaller companies. Moreover, because many of these companies are multinational firms that generate revenues from dozens of countries around the world, they provide some degree of international diversification within the equity allocation.
Most ETF investors elect to achieve their exposure to large cap stocks through an S&P 500 ETF, investing in either SPY or IVV (although some prefer alpha-generating alternatives). Composed of the 500 largest U.S.-listed stocks (with a few exceptions), the S&P 500 is considered by many as a reliable indication of broader stocks markets. Because these S&P 500 ETFs are cap-weighted, the bulk of holdings are in the largest companies, while the smaller firms (i.e., companies 300-500) receive small weightings. But some investors may prefer to avoid these lesser-known components altogether, investing only in “mega-cap” companies that have total market capitalizations in excess of $10 billion.
Mega Cap ETF Options
There are a number of potential uses for mega-cap stocks in a portfolio. Some investors may prefer to achieve the majority of their equity exposure through these stocks, avoiding more risky companies altogether. Others may use mega caps as a complement to holdings in small cap (or even micro cap stocks) to form a “barbell” approach to the equity component of their portfolios. ETFdb Pro members can see how these various equity ETFs are used in our line of all-ETF model portfolios (if you’re not a Pro member yet, sign up for a free trial or read more here).
For investors looking to efficiently gain access to mega-cap domestic equities, there are several ETFs that invest in the largest of the large U.S.-listed stocks. In descending order of number of holdings, these funds include:
- iShares S&P 100 Index Fund (OEF): The index underlying this ETF includes 100 of the largest publicly-traded companies, and has median and total market capitalizations of about $40 billion and $6.2 trillion. By comparison, the S&P 500 has a median market capitalization of about $8 billion. OEF has a beta of 0.92 relative to the S&P 500, indicating that these larger companies are slightly less volatile that the more diversified S&P 500.
- Vanguard Mega Cap 300 Growth ETF (MGK): Based on the growth companies of the MSCI US Large Cap 300 Index, this fund has holdings in 151 of the largest domestic equities. It has large holdings in Apple, Google, IBM, and Coca-Cola. It is one of the cheapest ETFs, with an expense ratio of just 0.11%.
- Vanguard Mega Cap 300 Value ETF (MGV): This ETF is based on the value companies of the MSCI US Large Cap 300 Index. It has 159 holdings, including large holdings in Exxon Mobil, Microsoft, and Johnson and Johnson. It has an expense ratio of just 0.12%.
- Vanguard Mega Cap 300 ETF (MGC): Based on the MSCI US Large Cap 300 Index, this fund invests in 300 of the largest domestic equities. Led by holdings in Exxon Mobil, Microsoft, and Procter & Gamble, MGC is well diversified across all sectors of the U.S. economy. With an expense ratio of just 0.13%, this ETF is one of the cheapest ways to establish mega cap exposure.
- Rydex Russell Top 50 ETF (XLG): As its name suggests, this ETF offers cap-weighted exposure to the 50 largest U.S. companies, which in aggregate represent more than 40% of the total market cap of the Russell 3000.
- Proshares Ultra Dow30 ETF (DDM): This ETF offers 2x leveraged exposure to the Dow Jones Industrial Average Index. It has 49 holdings and a 0.95% expense ratio.
- iShares Russell Top 200 Value ETF (IWX): This ETF is based on the value stocks of the top 200 largest capitalization equities. It has a beta of 0.88 relative to the S&P 500, indicating it is less volatile than the S&P 500. It has 131 holdings, with large holdings in Exxon Mobil, General Electric, and Johnson and Johnson. It has an expense ratio of 0.20%.
- iShares Russell Top 200 ETF (IWL): This ETF is based on the top 200 largest capitalization equities. It has holdings in Apple, Exxon Mobil, Microsoft, and Johnson and Johnson. IWL has an expense ratio of just 0.15%, and a beta of 1.07 relative to the S&P 500.
- iShares NYSE 100 ETF (NY): Based on the largest 100 companies by market capitalization listed on the NYSE, this ETF has holdings in companies such as Exxon Mobil, Johnson and Johnson, General Electric, and Wells Fargo. It has an expense ratio of 0.20%.
In 2014, the mega cap ETFs highlighted above have delivered about par to the S&P 500 or slightly worse. Performance in 2014 shows a clear inverse relationship with the number of individual holdings maintained by each ETF, indicating that the smaller components of the S&P 500 have outgained mega caps so far for 2014.
Disclosure: Long IVV.