A significant cross section of the investment community has been conditioned to benchmark their large-cap ETF exposure against the SPDR S&P 500 ETF (ARCA:SPY). After all, this market bell weather is the largest ETF in the world and the most commonly referenced yardstick of equity returns.
While investing in SPY makes sense if you are looking to track the market cap weighted S&P 500 Index, there is an extensive universe of unique large-cap funds that deserve your attention as well. Many of these innovative ETFs offer a strong case for targeting a niche style or index methodology that may enhance your returns over the long run.
Vanguard Growth Index Fund (ARCA:VUG)
Growth stocks have significantly outperformed value names over the last 5 years, which is why VUG is one of the top performing large-cap ETFs in its class. This fund has $17.5 billion in total assets tracking 371 companies across a variety of sectors.
According to fund company data, VUG has gained 17.30% in average annualized return over the last half decade, while SPY has notched a 16.01% profit (though 2/28/15).
Because of its growth demographic, VUG has 44% of its portfolio exposure dedicated to technology and consumer services companies. Apple Inc (NASDAQ:AAPL) and Walt Disney Company (NYSE:DIS) are examples of these sectors represented in VUG’s top 10 holdings. Conversely, this ETF has very limited exposure to utility, telecommunication, and basic material stocks.
I currently own this ETF for clients of my Opportunistic Growth portfolio and consider it to be a core large-cap position. With a 0.09% expense ratio and diversified basket of holdings, VUG should be considered as a strong SPY alternative for your portfolio as well.
FirstTrust NQ-100 Equal Weighted (NASDAQ:QQEW)
According to ETF.com, the PowerShares QQQ (NASDAQ:QQQ) has been the strongest large-cap equity ETF over the last 5-years. However, one drawback to investing in the most well-known ETF tracking the NASDAQ-100 Index is the market-cap weighted structure. This index construction methodology allows for a very top heavy asset allocation directed towards AAPL and Microsoft Corp (NASDAQ:MSFT) as the two largest companies.
For more consistent overall diversification, I recommend investing in the large-cap technology growth theme through QQEW. This fund reconstitutes theNasdaq 100 Index into an equal weighted structure that allows for a level distribution of assets across all 100 stocks.
The unique organization in QQEW generated annualized market price returns of 18.65% over the last 5-years, which again beat the performance of SPY. This ETF has a higher expense ratio of 0.60%, yet still offers a compelling basket of high growth stocks to own in a bull market.
S&P 500 High Quality Portfolio (NYSE:SPHQ)
Looking for a way to cherry pick top quality stocks from the S&P 500 Index? SPHQ has done just that by identifying companies with the potential for long-term growth through stability of earnings and dividends. The end result is a diversified portfolio of 130 stalwart stocks identified by Standard & Poor’s that are rebalanced and evaluated quarterly.
The majority of the portfolio exposure in SPHQ is in the industrial and consumer sectors, which makes this fund unique from many of the technology-heavy offerings that dominate this category.
SPHQ has a net expense ratio of 0.29% and over $550 million in total assets. This ETF has gained 18.67% in annualized total return over the last 5-years as well.
The Bottom Line
Picking an ETF for core large-cap exposure can be daunting considering the number of available offerings and differing views on long-term value. Often times, pairing multiple funds is an attractive portfolio construction technique to diversify your risk or hone in on a specific theme outside of a traditional benchmark.
No matter what fund you choose, it’s important to consider a risk management plan that includes a stop loss or sell discipline to mitigate riding out a bear market.
Disclosure : FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
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