Of late, Wall Street has been hitting new highs on several occasions, powered by chunks of upbeat data across the globe, easing monetary policies and optimism over the Sino-US trade deal. The phase one trade deal reached between Washington and Beijing and the subsiding tensions over Brexit will provide a huge boost to the stock market, especially mega-caps with large exposure to the international market, though general elections could weigh.
We enumerated the reasons in detail below for buying mega-cap ETFs: Trade Deal In the preliminary deal, China committed to buy $40 billion of American agricultural products annually, tighten measures for protecting American intellectual property and stop forcing American companies to transfer their technology while doing business in China. In return, President Donald Trump agreed to halt the planned tariffs on $156 billion of Chinese goods that were due to take effect from Dec 15 onward and also cut tariffs from 15% to 7.5% on $120 billion of Chinese goods that were imposed in September. However, the 25% tariff on $250 billion worth of Chinese imports levied in March 2018 will be intact. U.S. Trade Representative Robert Lighthizer stated that the deal will boost U.S. exports to China by $100 billion in 2021, nearly double from the current levels (read: Bet on Growth Investing Now: Top-Ranked ETFs & Stocks). Strong Macro Trends The U.S. economy is on a strong growth path with job additions at the fastest pace this year, unemployment dropping to the lowest level since 1969 and third-quarter GDP growth being revised upward from 1.9% to 2.1%. The housing market is also clearly showing signs of a strong recovery as lower mortgage rates and slower home price growth are acting as catalysts. In another strong signal, the Federal Reserve Bank of New York’s survey measure of general business conditions in the next six months jumped to a five-month high. Internationally, the initial deal erased fears of global growth concerns. The latest update from China shows that acceleration of industrial output and retail sales growth in November bolstered investors’ confidence. Meanwhile, Japan's economy expanded more rapidly than initially reported in the third quarter (read: Japan ETFs in Spotlight as Economy Beats Growth Estimates). Cheap Money Flows The Federal Reserve slashed interest rates thrice this year while the European Central Bank lowered interest rates with a new round of bond purchases in a package of easing measures. Meanwhile, the Japan government plans to finalize an economic stimulus package of $120 billion to support its economy. Australia, New Zealand and the most developing and emerging economies including Indonesia, Korea, Russia, South Africa, Turkey, India and Brazil joined this easing spree. Weakness in U.S. Dollar The dovish Fed put pressure on the U.S. dollar against the basket of currencies. The dollar index has been up around just 1% so far this year. A weak dollar bodes well for blue-chip companies, which derive majority of revenues from international markets. This is because they made dollar-denominated assets cheap for foreign investors, making U.S. multinationals more competitive, thereby reaping higher profits. As such, companies with greater percentage of international sales will likely outperform. Compelling Valuation The blue-chip index has an attractive valuation compared to other major indices. The benchmark has P/E ratio to forward 12 months of 20.94 compared to that of 24.85 for the S&P 500 and 36.99 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 ahead of the New Year. We highlighted five ETFs with a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy): SPDR Dow Jones Industrial Average ETF ( DIA Quick Quote DIA - Free Report) This is the largest and most-popular ETF in the mega-cap space with AUM of $22.6 billion and average daily volume of 2.8 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 (read: ETF Winners as US-China Deal Eases Trade Tensions). iShares S&P 100 ETF OEF This ETF follows the S&P 100 Index, charging investors 20 bps in annual fees. It holds 101 stocks in its basket and has AUM of $5.5 billion. The product trades in average daily volume of 362,000 shares and has a Zacks ETF Rank #2. Vanguard Mega Cap Growth ETF MGK With AUM of $5 billion, this ETF focuses on growth segment by tracking the CRSP US Mega Cap Growth Index. It charges 7 bps in annual fees and trades in good volume of around 159,000 shares a day on average. The fund is a Zacks #1 Ranked ETF (read: Bet on Growth Investing Now: Top-Ranked ETFs & Stocks). Vanguard Mega Cap Value ETF MGV 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 88,000 shares. MGV has amassed nearly $2.7 billion in AUM and carries a Zacks ETF Rank 2. Vanguard Mega Cap ETF MGC With AUM of $2.2 billion, this ETF tracks the CRSP US Mega Cap Index. It charges 7 bps in annual fees but trades in a moderate average daily volume of 75,000 shares. The product is a Zacks #2 Ranked ETF. iShares Global 100 ETF IOO This ETF offers exposure to a broad range of large international companies in developed and emerging markets by tracking the S&P Global 100 Index. It has accumulated $2.2 billion in its asset base and trades in average daily volume of 61,000 shares. The fund charges 40 bps in annual fees and has a Zacks ETF Rank #2. Invesco S&P 500 Top 50 ETF XLG 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 $929.5 million but trades in a small volume of about 35,000 shares a day on average. Expense ratio comes in at 0.20%. The product is a #2 Ranked ETF (read: A Look Back At S&P 500 Sector ETFs in 2019). iShares Russell Top 200 ETF IWL This ETF follows the Russell Top 200 Index, charging investors 15 bps in annual fees. It has AUM of $274.1 million and trades in average daily volume of 15,000 shares. The product has a Zacks ETF Rank #2. Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>