After small-caps took charge of the bull run through February to May, mega caps is at the forefront in June. This is especially true as the blue-chip Dow Jones index climbed 3% in the initial week of June, outpacing the gains of 2.5% for the S&P 500 and 2.6% for Russell 2000. The Dow Jones surged to its highest close in nearly three months on Jun 6 (read: 5 Hottest Small-Cap ETFs of 2018).
Improving domestic and international fundamentals as well as a firming dollar led to the outperformance of mega-cap stocks. As such, below we discuss some strong reasons for investing in mega-cap ETFs now.
Strong Domestic Economy
The recent raft of economic data points indicate robust economic growth after a first-quarter slowdown. American manufacturing is enjoying a 21-month winning streak, average hourly wages have been rising with 2.7% year-over-year growth, and unemployment has dropped to 3.8%, which is the lowest level since 2000. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged the most in five months by 0.6% in April, while consumer confidence rebounded near the 18-year high in May. With this, the United States entered its second-longest expansion phase since 1785 (read: Solid Data Fuels Trade of Momentum ETFs & Stocks).
Most importantly, the U.S. trade deficit, which has been the major reason for the ongoing tariff threats and trade war concerns, dropped for the second consecutive month in April by 2.1%, marking the lowest level since September. This data has bolstered confidence in robust economic growth given that the recent decline in deficit is expected to boost GDP in the second quarter.
Further, the massive $1.5-trillion tax cut will perk up the economy this year and save billions for corporations, boosting job growth and earnings.
Improving International Fundamentals
Although President Donald Trump's protectionist trade policies is undermining trade and weakening confidence in the global economy, renewed optimism in information technology and forecasts of double-digit second quarter earnings growth are acting as catalysts. Additionally, political instability in Italy and Spain that has roiled the global stock market at the end of last month has now settled down (read: 7 Exciting ETFs Ways to Profit From Ongoing Trade Spat).
China’s economic slowdown seems to be easing as manufacturing activity in May expanded at the fastest pace in eight months. Japan’s first-quarter slowdown seems to be temporary and that country will likely return to growth in the ongoing quarter though growth in some other emerging markets remains subdued. The World Bank reaffirmed its projection that the global economy will grow 3.1% this year and 3% in the next.
Weakness in U.S. Dollar
After strong acceleration in May, the U.S. dollar against the basket of currencies has started to weaken with the start of June. The dollar index is down 0.8% over the past week. A weak dollar bodes well for blue-chip companies, which derive most of their revenues from international markets.
This is because a weak dollar has made dollar-denominated assets cheap for foreign investors, making U.S. multinationals more competitive thereby leading to increased profits. As such, companies having a higher percentage of international sales will likely outperform. Moreover, commodities, emerging markets, as well as gold mining stocks are also getting a lift from a weak dollar.
The four months of underperformance for Dow Jones has made its valuation compelling. The benchmark has P/E ratio to forward 12 months of 16.21 compared to that of 17.15 for the S&P 500 and 23.01 for the Russell 2000 (see: all the Large Cap ETFs here).
Top ETFs to Consider
In view of the reasons discussed above, we strongly believe that investors should consider mega-cap ETFs. We have highlighted four funds having a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy):
SPDR Dow Jones Industrial Average ETF (DIA - Free Report)
This is the largest and most-popular ETF in the mega-cap space, with AUM of $21.7 billion and average daily volume of 5.3 million shares. It tracks the Dow Jones Industrial Average index, charging investors 0.17% in expense ratio. The fund has a Zacks ETF Rank #1.
Vanguard Mega Cap Growth ETF (MGK - Free Report)
With AUM of $3.9 billion, this ETF focuses on growth segment by tracking the CRSP US Mega Cap Growth Index. It charges 7 basis points in annual fees and trades in good volume of around 184,000 shares a day on average. The fund has a Zacks ETF Rank #2.
Vanguard Mega Cap Value ETF (MGV - Free Report)
This product offers exposure to value stocks and follows the CRSP US Mega Cap Value Index. Expense ratio is 0.07% while average daily volume is moderate at 72,000 shares. MGV has amassed nearly $2 billion in AUM and carries a Zacks ETF Rank #2 (read: 6 Large Cap Value ETFs to Buy in a Shaky Market).
Invesco S&P 500 Top 50 ETF (XLG - Free Report)
This fund follows the S&P 500 Top 50 ETF Index, which measures the cap-weighted performance of 50 of the largest companies on the S&P 500 index, reflecting the performance of U.S. mega-cap stocks. It has been able to manage assets worth $731.7 million but trades in a small volume of about 21,000 shares a day on average. Expense ratio comes in at 0.20%. The product has a Zacks ETF Rank #2.
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