Going Big With Megacap ETFs

5/21/2012


A glance at our buy list will show you that we favor megacap stocks. While precise definitions vary, companies with stock-market values of more than $100 billion are generally considered megacaps. Our buy lists are home to the seven largest U.S. stocks, and 12 of our buys have market capitalizations above $100 billion. 

The attraction is understandable — the very largest stocks seem unduly cheap. For example, the 50 biggest stocks in the S&P 500 Index, for which the minimum market value is $56 billion, have a median trailing price/earnings ratio of only 14, roughly 23% below the 15-year norm for these stocks. Based on month-end P/Es since the start of 1998 (172 months), the largest 50 stocks have been cheaper only 24 times.

The table below lists eight attractive exchange-traded funds (ETFs) that invest mainly in the very largest U.S. stocks. For comparison, we also list two funds centered on the S&P 500 Index. The eight megacap funds have at least 40% of assets in stocks that earn Quadrix Overall scores of at least 80, and none has more than 1% of assets in stocks with Overall scores below 20. All eight funds earn a weighted average Overall score of at least 68 and above-average scores for Quadrix Value. Finally, all eight have reasonable expense ratios.

Megacap funds have their drawbacks. For better or worse, many hold sizable positions in technology, one of the best-performing sectors so far in 2012. Take note of Apple's ($553; AAPL) influence. The stock, which has surged 37% so far this year, commands an outsized position in several funds, including a 19% weighting in PowerShares QQQ ($64; QQQ). Many megacap funds are top-heavy, with some investing more than 50% of assets in only 10 stocks.

MEGACAP ETFs
Weighted Avg.
Quadrix Score
------------------- % Of Assets -------------------
Total Return
Fund (Price; Ticker)
Avg.
Market
Cap.
($Bil.)
Value
Overll
Overall
Above 80
(%)
Overall
Below 20
(%)
Tech
Stocks
(%)
Apple
Weighting
(%)
10
Largest
Stocks
(%)
YTD
(%)
12
Mos.
(%)
Exp.
Ratio
(%)
Style
Megacap Exchange-Traded Funds
Guggenheim Russell
Top 50 ($98; XLG)
162
63
73
56
0
28
8.5
42
7.4
6.0
0.20
Blend
iShares Morningstar
Large Gro. ($74; JKE)
69
51
77
59
1
37
15.9
43
11.0
7.9
0.25
Growth
iShares NYSE 100 ($62; NY)
95
61
68
40
0
6
0.0
33
4.3
0.4
0.20
Value
iShares Russell Top 200
Growth ($34; IWY)
96
56
76
55
1
32
10.3
41
9.0
6.9
0.20
Growth
iShares S&P 100
($61; OEF)
118
63
73
50
0
23
6.7
32
7.0
4.1
0.20
Blend
PowerShares QQQ
($64; QQQ)
79
58
83
69
0
66
18.6
57
13.7
9.4
0.20
Growth
SPDR Dow Jones Industrial
($127; DIA)
119
61
71
51
0
18
0.0
56
4.4
2.9
0.17
Value
Vanguard Mega Cap 300
($46; MGC)
70
59
70
40
1
20
4.9
23
6.9
2.4
0.12
Blend
S&P 500 Exchange-Traded Funds
Guggenheim S&P 500 Eq.
Weight ($49; RSP)
14
56
60
25
5
13
0.3
3
5.9
(3.7)
0.40
Blend
Vanguard S&P 500
($61; VOO)
56
59
69
42
1
19
4.4
20
6.7
1.6
0.05
Blend
Note: Quadrix scores are percentile ranks, with 100 the best.     * Geometric average from Morningstar.

 

OUR RECOMMENDED MUTUAL FUNDS
Through May 15, our recommended Growth Portfolio has gained 5.7% so far this year, versus a 4.9% gain for its benchmark portfolio. The Conservative Portfolio is up 5.3%, versus 3.8% for its benchmark.
-- Year-To-Date --
--- % Of Portfolio ---
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Buffalo Growth ($26; BUFGX)
4.6
E
12
12
68
Dreyfus Midcap Index ($28; PESPX)
8.3
A
0
0
76
Dreyfus Small Cap Stock Index
($21; DISSX)
6.2
B
0
0
87
Homestead Small Company
($24; HSCSX)
6.8
A
7
8
98
Manning & Napier International
($8; EXITX)
(0.4)
C
7
7
64
T. Rowe Price New Horizons
($34; PRNHX)
10.1
A
10
10
99
Vanguard 500 Index ($123; VFINX)
6.6
B
6
7
82
Vanguard Dividend Growth
($16; VDIGX)
3.8
E
12
12
98
Vanguard Emerg. Mkts. Stock Indx.
($25; VEIEX)
3.0
D
0
4
70
Vanguard GNMA ($11; VFIIX)
1.2
C
5
4
89
Vanguard High Yield Corp.
($6; VWEHX)
5.7
D
5
5
91
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
3.1
B
0
0
65
Vanguard Selected Value ($19; VASVX)
3.9
D
5
6
86
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
2.1
B
0
0
95
Vanguard Total Bond Mkt. Index
($11; VBMFX)
1.9
E
9
0
51
Vanguard Total Int'l Stock Index
($13; VGTSX)
1.2
D
5
4
76
Vanguard Wellesley Income
($24; VWINX)
3.4
C
0
0
100
Vanguard Wellington ($33; VWELX)
4.4
C
6
9
92
Wasatch International Growth
($20; WAIGX)
10.6
A
5
5
94
Wells Fargo Advantage Discovery
($26; STDIX)
11.4
A
6
7
94
* Year-to-date ranks through May 15 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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