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ETFs for Mega-Cap Inclined

It may be hard to believe, but at some point the mega-caps (companies larger than $100 billion) will rotate back into favor and provide leadership to the market.

The way stock market cycles tend to work is that early on, coming out of a bear market, small-caps tend to do better as capital flows into the riskier sector.

This was true in the early 1990s, and has been true for most of this decade as well. As the cycle matures, larger and larger-caps tend to provide leadership. This also happened in the late 1990s.

Many people have called for large-caps to lead for several years now, and have been proved wrong. However, history is on their side, and at some point big will lead. The current cycle has been weird so far, given how long small-cap has led, but I would not want to bet that the cycle has been totally repealed either.

So what's an investor to do? Consider the following mega-cap exchange-traded funds (ETFs) for exposure to the sector.

There are several ETFs that focus on the largest companies. Although buying them today may not be ideal, it does make sense to know what these ETFs are and study whether they might make sense for when big-caps become the main event.

The Rydex Russell Top 50 (XLG) has all the big uglies. The fund invests in the 50 largest U.S. companies, and those 50 capture 40% of the capitalization of the Russell 3000 Index. XLG's sector breakdown is, not surprisingly, very similar to the S&P 500 with 22% in financials, 17% in technology and 16% in health care.

Although there are 50 stocks in the fund, the holdings are concentrated in the top 10, which represent 42% of the holdings. Exxon Mobil (XOM - Get Report) accounts for 7.13% of XLG, General Electric (GE - Get Report) 6.78%, and Microsoft (MSFT - Get Report) 4.63%.

Once these superliners finally do turn around, XLG will be a great proxy for the biggest of the big. The fund's expense ratio is 0.20, the beta is 0.90, the yield is 1.64% and the average market cap is $114 billion.

The elder statesman in the mega-cap ETF arena is the iShares S&P 100 Index Fund (OEF) (OEF). OEF's top 10 holdings mirror nine of the 10 in XLG but with smaller weighting in the fund. For OEF, the expense ratio is also 0.20, the beta is 0.88, the average market cap is $63 billion and the yield is 1.63%.

Those two funds are domestic only, but if you're looking for some international mega action, there are two ETFs that blend domestic and foreign in the mega-cap world.

The streetTRACKS DJ Global Titans Fund (DGT) has 50 holdings with 62% in the U.S., 17% in the U.K. and 7% in Switzerland. The fund has eight top 10 holdings in common with XLG and OEF, but DGT has a higher yield at 2.1%, the expense ratio is 0.50% and the weighted average market cap is $173 billion.

Of course there's also an iShares fund in the segment: the S&P 100 Global 100 Index Fund (IOO). This fund has 49% in the U.S., 14% in the U.K. and 7% in France. Its average market cap is $78 billion, it yields 1.77% and its expense ratio is 0.40%.

Comparing Four Monster ETFs
International exposure helps one break from the pack

These funds can potentially play an important role in a diversified portfolio. As you can see from the chart above, the funds tend to trade together, and IOO has been the best performer because it has the largest exposure to foreign stocks.

There are times in the stock market cycle when small-caps do better (usually the start of the cycle) and times when large-caps tend to outperform (usually toward the end of the cycle).

All four of these funds provide fast access to large-caps. At a time when the market starts to transition to favoring large-caps, buying one of these funds can substantially increase the average market cap of your portfolio while you're researching individual stocks as a more long-term solution.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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XLG $145.10 0.44%
OEF $91.49 0.42%
IOO $71.52 0.44%
DGT $64.30 0.39%
GE $30.12 0.77%


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