Tired of the nausea-producing volatility of trendy investment play of the week? Now might be the time to rediscover the stomach-soothing stability of mega-cap ETFs.
Sure, exchange-traded funds (ETFs) that track blue chips seem dull and their performance of late certainly won’t make many investors swoon. But with markets these days swinging like a pendulum on meth, stability is just as important — if not more important — than eye-popping returns.
On the face of it, these market Goliaths have a big yawn factor. But with Warren Buffett loading up on blue chips like Bank of America (NYSE:BAC) and IBM (NYSE:IBM) in his recent $24 billion shopping spree, it’s probably time for investors to take notice.
Mega-cap stocks are defined by size rather than sector, so their performance will vary dramatically based on the rising or slumping fortunes of their individual business operations. Since ETFs represent baskets of stocks, they give investors exposure to these supersize companies, diversification and the ease of trading on an exchange just like stocks.
It’s true that large and mega-cap stocks have significantly underperformed the market of late — actually, since about 2000. Still, there are four reasons why now is the time get on board:
- Buy like Buffett. Warren Buffett, the ultimate value investor, loves to buy blue-chip stocks at less than their fair value. That’s why he anted up big for mega-caps like IBM and BAC. His current portfolio includes a virtual Who’s Who of the mega-cap crop: Coca-Cola (NYSE:KO), Wells Fargo (NYSE:WFC), American Express (NYSE:AXP), Procter & Gamble (PG), Kraft (NYSE:KFT), Johnson & Johnson (NYSE:JNJ), Wal-Mart (NYSE:WMT) and Conoco Phillips (NYSE:COP).
- Attractive valuations. But don’t buy blue chips — or anything else — just because the Oracle of Omaha is doing it. With the market trading sideways this year, a lot of very solid companies are selling at very attractive valuations, when you consider their strong earnings.
- Stability and dividends. Mega-caps can be as good or better than bonds for income protection in volatile times. Reliable dividends and the prospects of better performance than sexier stocks in sluggish markets are another reason to hold some of these stocks in your portfolio.
- Mega-cap ETFs offer diversification. The right mega-cap ETFs have all the advantages stated above — and they provide healthy diversification across sectors.
Here are five mega-cap ETFs to track for the value — they also boast pretty low expense ratios:
Vanguard Mega Cap 300 ETF (NYSE:MGC). This ETF mixes in some large caps, too. MGC tracks the MSCI US Large Cap 300 Index. Major holdings include Exxon Mobil (NYSE:XOM), Apple (NASDAQ:AAPL), IBM, General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ) and AT&T (NYSE:T). With a market cap of $305 million, MGC has a year-to-date return of -1.4% and a current dividend yield of 2%. Expense ratio is a very attractive 0.12%.
iShares S&P Global 100 Index Fund (NYSE:IOO). IOO tracks the S&P Global 100 Index, which aims to measure the performance of large transnational companies that are of major importance in the global markets. Holdings include: Exxon Mobil, IBM, Chevron (NYSE:CVX), Coca-Cola (NYSE:KO) and Microsoft (NASDAQ:MSFT). Expenses are a tad higher — 0.4%, but still better than average. With a market cap of $930 million, IOO has a year-to-date return of -7.35%. Its current dividend yield is 2.9%.
iShares Russell Top 200 Index Fund (NYSE:IWL). IWL tracks the price and yield performance of the Russell Top 200 Index. Holdings include: XOM, AAPL, IBM, Procter & Gamble (NYSE:PG) and Pfizer (NYSE:PFE). Expense ratio is a cool 0.15%. With a market cap of $103 million, IWL has a year-to-date return of nearly -1%. Its current dividend yield is 1.9%.
SPDR Select Sector Fund – Financial (NYSE:XLF). XLF tracks the performance of the Financial Select Sector, which includes investment management, commercial banking and business banking companies. While financial companies have been beaten down of late, XLF is betting on the Buffett magic — its top holding is Berkshire Hathaway (NYSE:BRK.B). Other holdings include Wells Fargo (NYSE:WFC), JP Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C). The fund’s expense ratio is just 0.20%. With a market cap of nearly $4.6 billion, its year-to-date return is a disappointing -20%, but its fortunes are starting to rebound. Its current dividend yield is about 1.7%.
iShares S&P 100 Index Fund (NYSE:OEF). OEF seeks to replicate the price and yield performance of the S&P 100 Index. Holdings include: XOM, AAPL, IBM, KO and CVX. Expense ratio is just 0.2%. With a market cap of nearly $2.7 billion, the ETF has a year-to-date return of -1.4% and a current yield of more than 2%.
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks named here.