Do you like energy drinks? Many people do. In fact, they’re so popular that Monster Beverage Corporation (NASDAQ:MNST) changed its name in early January to accurately reflect the importance of its Monster energy drinks.
Formerly known as Hansen Natural (HANS), a $10,000 investment in Monster at the end of 2001 was worth almost $1.8 million at the end of 2011. That’s a staggering return on investment. But those interested in catching some of its future growth by buying its stock might want to think twice.
It’s not that I have a problem with the company, it’s just that reversion to the mean suggests the next 10 years won’t be nearly as profitable as the past 10 were. But if you’re really giddy about Monster, why not do so through a mutual fund or ETF? You’ll reduce your risk exponentially while still participating in its success.
Monster is the top holding in the S&P MidCap 400 Index with a current weighting of 0.72%. Generally, the definition of a mid-cap stock is a company with a market cap between $2 billion and $10 billion. None of the top 10 holdings has a market cap of less than $6.3 billion, with Monster at $9.3 billion.
When investing in ETFs or mutual funds, the most important criteria is the total cost of ownership. Sales charges, expense ratios, taxes, etc. These all factor into the attractiveness of an investment. Thankfully, index funds — whether exchange-traded or as a mutual fund — tend to possess reasonable costs.
BlackRock offers the iShares S&P MidCap 400 Index (NYSE:IJH) and State Street has the SPDR S&P MidCap 400 ETF (NYSE:MDY). The SPDR’s average daily volume is three times the iShares ETF at 3.5 million shares. Despite the additional liquidity, the iShares fund seems to be a slightly more appropriate investment for those looking to own Monster Beverage.
IJH’s expense ratio is 0.21%, four basis points less than MDY. In terms of turnover, which affects trading costs, the iShares fund turns 14% of its portfolio annually compared to 18% for the SPDR fund. Finally, IJH’s tax-adjusted return for the past 10 years is 6.55% annually, 40 basis points higher than MDY.
None of the three factors, however, are a huge difference. Nor is the fact that the IJH has Monster as its top holding, whereas it’s No. 2 in the MDY. In the end, both of these funds will get the job done.
On the mutual fund side, two funds have my attention: the Northern Mid Cap Index (MUTF:NOMIX) and the Columbia Mid Cap Index A (MUTF:NTIAX). Both try to replicate the index, and their performance over the past five years is virtually identical.
The Northern fund is the cheaper of the two with an expense ratio of 0.29%, 16 basis points less than the Columbia index fund. However, NTIAX has a turnover rate of 10%, 300 basis points less than NOMIX and lower than both of the ETFs.
Each fund has a weighting in Monster Beverage between 0.62% and 0.64%. Neither has Monster as its top holding. Despite the extra turnover, the Northern Fund’s tax adjusted return on an annual basis is 2.23%, 32 basis points higher. If you’re going the mutual fund route, both are worth considering.
It’s generally accepted that as you build more assets, ETFs become a better alternative than mutual funds because of lower fees. On a tax-adjusted basis, there is no comparison between the performance of the two ETFs and the two mutual funds. Both ETFs did better over the last five years and likely will continue to do so.
If you’re interested in owning Monster Beverage, but also want to diversify, the iShares S&P 400 MidCap Index appears to be the best choice.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.