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Meet a Mega-Cap ETF Star

NEW YORK ( TheStreet) -- As investors regain their appetite for risk in the wake of a global financial crisis, funds have been flowing into ETFs like iShares MSCI-Emerging Markets (EEM) and SPDR Barclays Capital High Yield Bond (JNK).

A new series of mega-cap funds from iShares , however, may be part of a changing tide back towards quality.

Mega Cap Star

The three new nuanced mega-cap funds from iShares -- the Russell Top 200 Value Index Fund (IWX), Russell Top 200 Index Fund (IWL) and Russell Top 200 Growth Index Fund (IWY) -- join an already crowded field of mega-cap choices.

Among the most popular in the "mega-cap" category are the Vanguard Large Cap ETF (VV) and iShares Russell 1000 (IWB).

While investors have been busy chasing the highest yields possible, it is important to keep quality at the core of your portfolio. Companies like Exxon Mobil (XOM - Get Report), Microsoft (MSFT - Get Report) and General Electric (GE - Get Report) tend to be well-diversified and hold up well during market fluctuations.

The influx of assets into high-risk/high-yield ETFs is not sustainable over the long term, and investors should make sure they have solid mega-cap names in the core of their portfolios.

One standout name among the mega-cap ETFs is PowerShares FTSE RAFI US 1000 (PRF). While this fund is slightly more expensive and less liquid than better known funds like VV and IWB, its year-to-date performance make the price tag more than worthwhile.

PRF has jumped 37.56% year to date as of Oct. 5, 2009, while IWB and VV advanced just 19.13% and 18.01% respectively. While PRF's 0.39% fee may seem daunting next to VV's 0.13% and IWB's 0.15%, the fund's multifaceted methodology is worth paying for.

PRF uses an annually rebalanced passive approach to stock selection that breaks with traditional cap-weighted approaches. IWB, for instance, uses a traditional capitalization weighted strategy to select the relative weights of its underlying components. PRF measures mega-cap companies on the basis of four fundamental factors: dividends, book value, sales, and cash flow.
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VV $93.73 -0.58%
JNK $34.70 -0.52%
IWB $113.82 -0.59%
EEM $32.79 -1.62%
GE $30.07 -1.83%


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