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), Microsoft ( MSFT) and General Electric ( GE) 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.

Rather than being actively managed, PRF outperforms, using a different type of passive index. The traditional indexes like S&P, Russell and Wilshire indexes use a market cap-weighted approach. As the ETF world has evolved, issuers have partnered with index providers to give investors exposure to indexes that rely on factors outside of market cap. As more issuers join the ETF universe, more unique indexing approaches will develop.

PRF is a good pick for long-term, mega-cap investing. Because it has higher fees and lower liquidity than some of its contemporaries, it is not the preferable fund for people looking to rapidly buy and sell a basket of mega cap stocks. Mega-cap investing, however, should be for the long term, and a buy-and-hold fund like PRF works well at the center of a solid portfolio.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion does not have any positions in the funds mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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