Large-cap ETFs are becoming more attractive by the day. The topsy-turvy conditions of the S&P 500 have pushed the CBOE Volatility Index up by 21% in the past month as investors brace for a tough road ahead. This uptick in volatility is providing a strong case to take cover in large-company shares, which are at the heart of well-balanced portfolios built to hold up in stormy weather. Adriana Posada, a portfolio manager of the American Beacon Large Cap Value Fund ( AAGPX), stresses the importance large-cap equities. "They should be the bedrock of an individual investor's portfolio because they tend to be less volatile," she said. Posada notes that an ETF or mutual fund can prove to be a cost-effective method to obtaining large-cap exposure. "Buying a basket of stocks is a very good option," she said. "It can be difficult for an individual investor to build a diverse portfolio if they do not have a high net worth." Large-cap ETFs such as the iShares S&P 500 Index ( IVV) and the PowerShares QQQ Trust ( QQQQ), which track the S&P 500 and the Nasdaq 100 Index, respectively, have had a rough go so far in 2008. These funds are down 14.4% and 15.0%, respectively. Last year, they rose 3.3% and 17.9%. Large-cap ETFs that subscribe to a particular investing style have not fared any better. For instance, the Vanguard Growth ETF ( VUG), a fund comprised predominantly of large-cap names such as Microsoft ( MSFT), Apple ( AAPL) and Google ( GOOG), has declined 13% year-to-date. The picture for value has been equally sluggish. The Vanguard Value ETF ( VTV), which holds names such as ExxonMobil ( XOM), Chevron ( CVX) and Pfizer ( PFE), has slid 16%.
These price declines have generated rising interest in the large-cap universe, particularly on the basis of valuation. "I think large-caps are very compelling right now because they are very cheap when compared to small-caps," said Rafael Resendes, portfolio manager for the Toreador Large Cap Value Fund ( TORLX). "We haven't seen this level of value in large-caps in years." Despite the attractive valuations, Resendes notes that there is still a degree of uncertainty surrounding large-cap ETFs and the market as a whole. "We're still struggling with the question of how much the economy is ultimately going to slow down," he said. "I also think the upcoming election is going to have very important implications for the market and the future of capital-gains rates." For investors who are not sold on these ETFs or are only looking for an individual stock to fill out their portfolio, opportunity may be knocking in the form of a couple of large-caps that have been around for decades. Posada has a long-term bullish view on International Business Machines ( IBM), one of the top holdings of her fund. In July, IBM reported second-quarter results that included a 32% increase in diluted EPS on a 13% rise in sales from a year earlier. "IBM has an ideal business model with a significant portion of its revenue coming from services and abroad," she said. "It has transformed itself into more of a software company and a service provider." Resendes likes the refiner Valero Energy ( VLO), which he thinks has upside potential of 40% to 50% in its current stock price. "Valero is particularly interesting because it didn't participate in the commodity boom of recent months," he said. "Right now it is one of the best-positioned refiners with a lot of flexibility in its product mix." Valero presently trades at 7.8 times future earnings.