When only the biggest stocks will do

Mega-cap stocks may be slow-growing, but their low volatility has appeal.

Michael Rawson, CFA 25 August, 2015 | 5:00PM

Guggenheim Russell Top 50 Mega Cap ETF (XLG) invests in the biggest of the big. In fact, its US$209 billion average market cap is higher than any other mutual fund or exchange-traded fund in the United States and Canada, and nearly three times that of the S&P 500 Index. Mega-cap stocks have different risk and return characteristics than mid- and small-cap stocks, and those looking to target these stocks might consider XLG. The fund provides low-cost, market-cap-weighted exposure to 50 of the largest U.S. companies.

Mega-cap stocks tend to be mature industry leaders or globally diversified conglomerates with sustainable competitive advantages and international reach. While mega-cap stocks individually may have lower risk than small caps, they may also have lower growth potential.

This ETF is a suitable core holding for the U.S. equity portion of a portfolio, but there are better-diversified and lower-cost alternatives for those looking for complete exposure to the U.S.-equity market. It tracks the Russell Top 50 Mega Cap Index, which covers roughly the largest 50 U.S. stocks in the Russell 1000, so it lacks small-, mid- and even many large-cap stocks. In aggregate, it covers less than half of the U.S.-equity market. In contrast, the Russell 3000 Index covers more than 98% of the total stock market. Although including smaller-cap stocks increases volatility, the broader Russell 3000 Index has generated a higher return since the 2001 inception of the Russell Top 50 Mega Cap even after adjusting for its higher risk, as a result of the strong performance of small-cap stocks.

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About Author

Michael Rawson, CFA

Michael Rawson, CFA  Michael Rawson, CFA, is an analyst covering equity strategies on Morningstar’s manager research team.

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