Mega-Cap ETFs Give You the Bluest Blue Chips

People often associate “big” with “safe.” They think big ships are safer than small boats. Big banks are safer than small banks. Big stocks are safer than small stocks.

Of course, it doesn’t always work out that way … the gigantic Titanic turned out to be quite a bit more dangerous than the Skipper’s S.S. Minnow. And on average, you are much safer aboard a small plane than you are in your supersize SUV.

Nonetheless, stock investors who want to apply the “Big = Safe” principle often lean toward “mega-cap” stocks. These are the largest of the large — big companies that are often household names because they’re everywhere. Think of stocks such as …

Coca-Cola is one of the most widely recognized brands in the world.

ExxonMobil (XOM)
Coca-Cola (KO)
AT&T (T)
Microsoft (MSFT)
Procter & Gamble (PG)

You’ve probably spent money with all these companies — one way or the other. And most people find it hard to remember a time when they didn’t exist!

Many of the largest foreign companies are also familiar names. In fact, many have a significant, or even a dominant, market share with U.S. consumers. Examples include …

Nestle
Bayer
BP
Toyota
Canon

Like mountains and valleys, mega-cap stocks are simply part of the landscape. They’re the bedrock — the foundation on which smaller things are built.

Bayer dominates the U.S. market.

This quality gives mega-cap stocks an extra value. For instance, ExxonMobil isn’t worth as much as it is just because it represents oil in the ground … its shares fetch a premium price for no reason other than being ExxonMobil.

Is this fair to smaller companies? No, it’s not. But I could argue that mega-caps have a handicap, too. After all, they cannot grow as fast as small-cap stocks because they are simply too big.

The point is that mega-caps are a category of their own.

ETFs Cover the Mega-Caps …

Exchange traded fund (ETF) sponsors want to cover every possible investment niche, so they’ve created a number of mega-cap funds. Here’s an overview for you.

To start off with, I think investors should always take a global approach to their investing. But if you’ve been reluctant to invest internationally, these first two ETFs might help you take a step in that direction since most of the foreign holdings will be names you are already familiar with:

SPDR DJ Global Titans (DGT) typically holds the 50 largest stocks from around the world. The “smallest” holding is Nokia, the cell phone giant located in Finland. Stocks from the U.S. comprise about 60 percent of these global titans, while the U.K., Switzerland, and France are the next largest of the 12 countries represented.

iShares S&P Global 100 Index Fund (IOO) is similar to DGT in that it takes a global approach to mega-cap stocks. The major difference is that it holds twice as many stocks. This approach brings the U.S. weighting down to about 43 percent of the fund. The “smallest” stock in IOO is Philips Electronics of the Netherlands.

However, if you prefer to focus just on the U.S., there are numerous mega-cap ETFs to choose from:

Rydex Russell Top 50 ETF (XLG) holds the largest U.S. listed stocks. And even though it consists of only 50 stocks, it represents nearly 40 percent of the total market cap of the U.S. stock market.
DIAMONDS Trust (DIA) consists of 30 blue-chip stocks in one ETF, but they are not just any 30 stocks. They are the same ones that make up the Dow Jones Industrial Average, the most well-known stock market index in the world.
iShares S&P 100 Index Fund (OEF) is another way to capture many of the largest U.S. listed companies with an ETF. As its name suggests, OEF consists of the 100 largest stocks that make up the famous S&P 500 index.

There are also two “families” of mega-cap ETFs …

You may be familiar with the nine-square style box from Morningstar that divides the market into three capitalization segments (large, mid, and small) and three valuation segments (value, blend, and growth). Well, think of these mega-cap families as adding another row across the top of that matrix:

Vanguard Mega Cap 300 Index ETF (MGC) is based on the largest 300 U.S. listed stocks. This group is then further divided into ETFs representing value (MGV) and growth (MGK).
iShares Russell Top 200 Index Fund (IWL) is a relatively new offering focused on the largest 200 U.S. listed stocks. This group is then further divided into ETFs representing value (IWX) and growth (IWY).

In the interest of completeness, I’m going to tell you about a few other mega-cap ETFs:

iShares NYSE 100 Index (NY) simply consists of the largest 100 stocks listed on the New York Stock Exchange.
SPDR DJ STOXX 50 ETF (FEU) holds the 50 largest stocks in the pan-European Dow Jones STOXX Total Market Index.
PowerShares Active MegaCap (PMA) takes an “active” approach to mega-cap investing while all the others listed above are index-based ETFs. The managers of PMA attempt to pick the 40 or so stocks they think will do best from the Russell Top 200 Index.

One of the characteristics of my favorite ETFs is their ability to provide access to various segments of the market. So when you want a stake in the largest stocks in the world — the mega-cap stocks — consider the ETFs outlined above.

Best wishes,

Ron

P.S. I’m now on Twitter. You can follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

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