2 Mega-Cap Funds for Cautious Investors

NEW YORK (TheStreet) -Although the economic turmoil raging outside of the U.S. borders weighed on the performance of the domestic markets throughout much of November, I urge investors to avoid getting frightened away. As we have seen throughout 2010, the recovery is still intact and the markets have remained resilient.

While headwinds will certainly persist the rest of this year and into 2011, investors may want to view November's performance as a chance to take some defensive-minded steps back into the marketplace.

Mega-cap stocks are an ideal way to achieve this task. Using ETFs and mutual funds it is possible to gain access to a wide range of companies falling under this style classification.

Representing the largest of the publicly traded companies, mega caps are typically household names which have exposure to clients and customers well beyond the shores of the United States.

Whereas small- and micro-cap companies are notable for their increased volatility, investors can typically rely on companies such as Exxon Mobil ( XOM), Apple ( AAPL), and Wal-Mart ( WMT) to remain stable even in the face of economic headwinds. Given their reduced volatility, companies such as these are ideally suited for the most conservative long term investing strategies.

Investors have long had access to ETFs including SPDR S&P 500 ETF ( SPY) and SPDR Dow Jones Industrial Average ETF ( DIA), which track a basket of large companies. However, as the ETF industry has expanded some fund sponsors have attempted to launch funds which focus specifically on companies bearing the mega-cap classification. So far the success of these products has been bipolar.

While a small handful of these funds, such as the iShares S&P 100 Index Fund ( OEF), have managed to generate a respectable following, many others have struggled to gather steam.

Products such as the iShares Russell Top 200 Index Fund ( IWL) and Rydex Russell Top 50 ETF ( XLG) change hands less than 50,000 times per day and I consider them too illiquid for long-term investors.

OEF's index is headlined by XOM, AAPL, Microsoft ( MSFT), International Business Machines ( IBM) and Proctor & Gamble ( PG) which together represent 17% of the fund's portfolio. Other notable constituents include General Electric ( GE), AT&T ( T) and Berkshire Hathaway ( BRK.A).

Aside from exposing investors to large, stable firms hailing from diverse regions of the market, OEF also pays out a comfortable 2% dividend.

Another promising way to access companies falling under the mega cap classification is through the Fidelity Mega Cap Stock Fund ( FGRTX).

Unlike OEF and other ETF options, FGRTX is actively managed and therefore can rebalance its holdings to coincide with market conditions. As of the end of September, FGRTX's top holdings are noticeably different from its ETF competitors. Topping the list are Wells Fargo ( WFC), XOM, JPMorgan ( JPM), Cisco ( CSCO), and AAPL.

Due to the fact that FGRXT is actively management, investors holding the mutual fund option do face higher expenses. The fund charges 0.81% while OEF charges 0.20%.

Many analysts and market commentators are predicting strength as we head into the homestretch of 2010. Although the clouds appear to be clearing, investors needn't dive headlong into excessively risky asset classes. Rather, those looking for a cautious way to wade back into the equity markets should consider adding a mega-cap fund such as OEF or FGRXT to their well balanced portfolios.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management owned Fidelity Mega Cap Stock Fund.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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