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Is Principal U.S. MegaCap ETF (USMC) a Strong ETF Right Now?

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Making its debut on 10/12/2017, smart beta exchange traded fund Principal U.S. MegaCap ETF (USMC - Free Report) provides investors broad exposure to the Style Box - Large Cap Blend category of the market.

What Are Smart Beta ETFs?

The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.

Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.

If you're the kind of investor who would rather try and beat the market through good stock selection, then smart beta funds are your best choice; this fund class is known for tracking non-cap weighted strategies.

These indexes attempt to select stocks that have better chances of risk-return performance, based on certain fundamental characteristics or a combination of such characteristics.

While this space offers a number of choices to investors, including simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies, not all these strategies have been able to deliver superior results.

Fund Sponsor & Index

USMC is managed by Principal Funds, and this fund has amassed over $1.62 billion, which makes it one of the larger ETFs in the Style Box - Large Cap Blend. Before fees and expenses, this particular fund seeks to match the performance of the Nasdaq US Mega Cap Select Leaders Index.

The Nasdaq U.S. Mega Cap Select Leaders Index uses a quantitative model designed to identify equity securities of companies with the largest market capitalizations in the Nasdaq US 500 Large Cap Index, with higher weights given to securities that are less volatile.

Cost & Other Expenses

Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.

Operating expenses on an annual basis are 0.12% for this ETF, which makes it one of the least expensive products in the space.

It has a 12-month trailing dividend yield of 1.66%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation in the Information Technology sector - about 28.90% of the portfolio. Healthcare and Telecom round out the top three.

Looking at individual holdings, Apple Inc Common Stock Usd.00001 (AAPL - Free Report) accounts for about 5.91% of total assets, followed by Pfizer Inc Common Stock Usd.05 (PFE - Free Report) and Pepsico Inc Common Stock Usd.017 (PEP - Free Report) .

USMC's top 10 holdings account for about 32.82% of its total assets under management.

Performance and Risk

So far this year, USMC has lost about -4.89%, and it's up approximately 12.76% in the last one year (as of 04/12/2022). During this past 52-week period, the fund has traded between $37.75 and $44.69.

The ETF has a beta of 0.90 and standard deviation of 21.21% for the trailing three-year period. With about 47 holdings, it has more concentrated exposure than peers.

Alternatives

Principal U.S. MegaCap ETF is a reasonable option for investors seeking to outperform the Style Box - Large Cap Blend segment of the market. However, there are other ETFs in the space which investors could consider.

IShares Core S&P 500 ETF (IVV - Free Report) tracks S&P 500 Index and the SPDR S&P 500 ETF (SPY - Free Report) tracks S&P 500 Index. IShares Core S&P 500 ETF has $325.99 billion in assets, SPDR S&P 500 ETF has $402.55 billion. IVV has an expense ratio of 0.03% and SPY charges 0.09%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Style Box - Large Cap Blend.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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