Mega Cap ETFs: Is Bigger Always Better?
Wednesday, December 16th, 2009Michael Johnston submits:
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.
