After a frozen Q1, the second half of the year has been pretty great so far for the U.S. stock markets. Unemployment rate in June fell to six-year lows, new home sales data for May sparked optimism while manufacturing and consumer confidence data is ensuring the ascent of the domestic economy, albeit at a slow pace (read: Top ETF Stories of June).
The Fed’s decision to exit the QE era this year (probably at least) also gave further indication of economic revival. As a result, the equity benchmarks hit highs on various occasions this year. Corporate earnings are also taking a better shape than what we saw in the preceding quarter. Goldman Sachs lifted its S&P 500 price target to 2050 from 1900 for 2014.
As the S&P 500’s record run suggests, large caps have been strong performers so far this year, and the gains are widely expected to continue in the summer months. The Fed has also raised concerns about the stretched valuations of the small-cap space recently leaving larger capitalization as the feasible solution to bet on at the current level.
Style-wise, growth stocks should earn investors considerable returns as the U.S. economy started to gain momentum. Growth investing is basically a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend). However, growth stocks and the resultant ETF exhibit a higher degree of volatility especially compared to value stocks (read: 3 American ETFs That Saw Fireworks to Start 2014).
Also, the market might witness volatility once the Fed withdraws monetary support fully. Additionally, the upcoming mid-term elections in November 2014 can result in considerable volatility and market correction.
So, it would be wise to play the growth momentum of the Wall Street in a foolproof manner. Large caps will offer some immunity as these are less inclined to volatility, especially when compared to their small cap counterparts (read: Best ETF Strategies to Consider Now).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the large cap growth sector, we have taken a closer look at the top ranked JKE, which has a Zacks ETF Rank of 1 or Strong Buy with a Medium risk tolerance level. The details are highlighted below (see: all Top-Ranked ETFs here):
JKE in Focus
For those looking for outsized growth rates, JKE could be an intriguing choice. Launched in June 2004, the fund seeks to match the price and yield of the Morningstar Large Growth Index, before fees and expenses.
With a total of 112 stocks in its basket, the product is moderately spread across individual securities. The top three holdings – Apple, Google Class A shares and Google Class C shares – comprise about 17.14% of the combined assets in the basket with Apple receiving as much as 10.88% allocation.
Though such an inclination toward Apple calls for higher concentration risk, at present this heavy Apple-focus has been a plus point for the fund. Investors should note that investment firm Barclays recently upgraded the stock from an equal-weight rating to overweight as well as inflated the price target by 16%. Notably, the stock has soared about 57% over the past one year (as of July 21, 2014).
From a sector perspective, Technology has been the top priority of the fund representing about 28.25% of the total assets, followed by consumer services and Oil & Gas with 20.10% and 10.10% share, respectively.
The product so far has managed assets of $536.1 million and is less volatile as indicated by the annualized standard deviation of 20.1%. However, the fund trades in a small volume of roughly 15,000 shares per day, suggesting wide bid/ask spreads and total costs of higher than the 25 bps expense ratio.
The P/E and P/B ratio is quite high for the fund at just over 30.0 and 6.0, respectively, once again reinforcing its sole focus on growth. JKE has gained about 25% over the trailing one-year period and nearly 8% so far this year.
The ETF has breezed past many broader market large cap fund SPY and growth funds like (VUG) or (IWF) by a pretty good margin in the trailing one-year time frame, with big gains in longer time periods as well. Over the past one year, SPY added about 19% while VUG and IWF were up about 22% and 21% (as of July 21, 2014) so it could be an ideal way to play the space.
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