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By Jared Cummans

The ancient Chinese curse that reads “may you live in interesting times” has always seemed more like a blessing than a wishing of ill will. But perhaps in the current investing environment, the negative side of the phrase becomes more apparent. Between lingering debt concerns in Europe, the fallout from the Gulf oil spill, China’s new currency policy, and a host of hurdles in the domestic economy, these are certainly interesting times.

The outlook for financial markets is uncertain, and the number of bears seems to have multiplied considerably in recent months. Different investors have reacted to the current environment in different ways. Those with higher risk tolerances may establish short positions, perhaps even using leveraged ETFs to amplify exposure. Some sell off risky assets and flock to safe havens such as bonds and gold bullion, preferring to reduce exposure to equities until the storm clouds clear.

While these strategies undoubtedly reduce risk, they introduce the potential of watching an impressive rally from the sidelines. As any investor who sold equities in March 2009 can attest, the feeling of regret that comes from missing out on a bull run can be devastating (and the financial impact of such a scenario can be undesirable as well).

For investors looking to dial back exposure to risky assets but also wary of missing out on a rally, mega-cap ETFs may present an interesting option. These funds, which focus on the largest of the large cap equities, generally exhibit low betas and offer less volatility than the broader markets. So while they offer some degree of safety, mega caps also allow for exposure to the market, allowing investors to participate in any run higher. Below we outline four mega-cap ETFs that may work as a less extreme reaction to market turmoil:

iShares S&P 100 Index Fund (NYSEARCA:OEF)

OEF seeks to replicate the performance of the S&P 100 Index, a benchmark constructed of stocks from a broad range of industries, chosen for market size, liquidity, and industry group representation. This ETF allocates nearly 80% of its assets to giant cap firms, with major holdings including Exxon Mobil, Microsoft, and Apple. Although OEF has only 100 or so holdings, the concentration among big names is not significant; the top ten account for only about 30% of assets. This fund also spreads its assets over a wide range of sectors, with the highest weighting (financials) coming in at only about 16%. OEF has a beta of 0.93, and pays a healthy dividend yield of more than 2%. OEF charges an expense ratio of 0.20%.

Rydex Russell Top 50 ETF (NYSEARCA:XLG)

XLG measures the Russell Top 50 Index, a market capitalization weighted index of the 50 largest stocks in the Russell 3000 universe of U.S.-based equities. XLG allocates approximately 97% of its assets to giant market-capitalization firms. This ETF has the same top ten holdings as OEF, although they make up slightly different percentages of XLG; the top ten holdings of the Rydex fund account for about 40% of total assets. With a beta of just 0.88 and a dividend yield around 3%, XLG is one of the least volatile equity ETFs available. From an expense perspective, XLG charges 0.20%.

Vanguard Mega Cap 300 ETF (NYSEARCA:MGC)

Vanguard’s MGC follows the MSCI US Large Cap 300 Index, a broadly diversified index of stocks of the largest U.S. companies. MGC shares many of its top ten holdings with both OEF and XLG, although the depth of exposure offered is quite different. Overall, MGC only allocates roughly 56% of its assets to giant cap firms, with the remaining 44% going to large and medium cap companies. With 300 holdings, the concentration in the top ten holdings is more moderate; they make up just about 20% of assets. MGC’s beta comes in at 0.94, putting it closer to the market average. This ETF is the cheapest on this list, charging an expense ratio of just 0.13%.

iShares Russell Top 200 Index Fund (NYSEARCA:IWL)

This ETF tracks the Russell Top 200 Index, which measures the performance of the largest capitalization sector of the U.S. equity market. This index includes securities issued by approximately 200 largest issuers in the Russell 3000 Index, representing approximately 65% of the market capitalization of all publicly-traded U.S. equity securities. Again, this fund shares most of its largest holdings with the three aforementioned ETFs, and also allocates holdings to a wide range of market sectors. As far as market capitalization is concerned, IWL allocates the majority of its assets to giant firms (about 64%), with the rest falling in mainly large caps. From an expense standpoint, IWL charges 0.15%.

Disclosure: No positions at time of writing.

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Source: Do Mega Cap ETFs Offer Mega Returns? Four Funds to Ponder