You’ve probably heard the phrase, “You can’t see the forest for the trees.” Well, sometimes the trees are what we’re looking for.
What you probably have noticed is that technology and financial services stocks have been soaring this year. And if you’ve really been paying attention, you have noticed that growth stocks are doing far better than value so far. But what we’re looking for is the tree at the center of this performance forest.
Large Caps Are In — If You Know Where to Look
Large-cap growth stocks are the best-performing equities of the markets this year, with iShares Morningstar Large Growth (NYSE:JKE) up around 15%.
But let’s be clear: Not all large-cap stocks are doing well. In fact, a significant portion of this group is severely underperforming compared to the rest of the equity universe.
Of the nine Morningstar style groups, large-cap value comes in dead last, with the iShares Morningstar Large Value (NYSE:JKF) up about 7% for the year.
Historically, certain groups go in and out of favor based on the economic landscape. Some years, growth stocks outperform; other years, value names are the best way to go. The same can go for small-cap vs. large-cap stocks, and specific sectors like health care and utilities.
The question is: Why has large growth more than doubled the return of its smaller counterpart? Let’s dig a little deeper into the underlying sectors pushing these ETFs.
The Sector(s) of Choice
Four of the top five holdings represented in the Large Growth ETF are technology stocks, led by media darling Apple (NASDAQ:AAPL), as well as Google (NASDAQ:GOOG) and Oracle (NASDAQ:ORCL). Technology stocks make up more than a third of the fund’s total holdings and clearly have been the driver behind JKE’s hot start.
Meanwhile, at the bottom of the totem pole, Large Value is dominated by energy, financials and health care. Although financial stocks have been on fire, JKF’s biggest holding at 12%, Exxon Mobil (NYSE:XOM) has been a huge laggard, up less than 2% on the year. Exxon isn’t the only thing holding JKF back, however — health care and industrial stocks both have trailed the broader market.
At the end of the day, it’s financial and technology stocks that are on a tear this year, with the Select Sector Financial SPDR (NYSE:XLF) and the Technology SPDR (NYSE:XLK) up more than 17% year-to-date. Large-cap names like Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) dominate the financial side, while the aforementioned Apple and Microsoft (NASDAQ:MSFT) lead technology.
Apple is King of the Hill
So what’s the common denominator among the best performing ETFs of the year?
Let’s recognize that these numbers are all skewed a bit by the presence of Apple, which is the largest holding in both the large growth and technology spaces. AAPL shares are up a ridiculous 45% on the year, after gaining “just” 26% in 2011. (Yes, I know.)
Apple shook off the untimely death of its iconic founder, Steve Jobs, and got back to the business of wowing the world, with the new iPad being the latest driver of AAPL excitement. Despite the run-up, shares still only trade at about 16 times current earnings, well below AAPL’s 21.9 five-year average.
Apple With a Side of Caution
If you feel like Apple still has room to appreciate — but you’re worried Apple’s expected growth might already be priced in — jump into large-caps and buy one of the ETFs where Apple represents a significant portion of the portfolio.
That brings us back full circle to Large Growth. Apple represents almost 16% of JKE’s holdings, which allows you to participate in AAPL’s future appreciation, if any, but also gives you a bit of a hedge. In fact, JKE is more diversified than just a technology fund, and gives you good exposure to consumer cyclicals, industrials, health care and more. Should some of the lesser-performing sectors heat up, you’ll have exposure and the ability to profit from their rise.
As of this writing, James Mack did not hold a position in any of the aforementioned securities.