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Large cap stocks are generally preferred for asset allocation as they tend to be less volatile and give decent returns over the long term. Large cap stocks can be further classified as growth and value stocks. Growth stocks belong to exciting and fast-growing sectors like technology, financials etc. and tend to give superior returns as compared to value stocks. At the same time, growth stocks are much more volatile vis-à-vis value stocks.

The above facts make large cap growth ETFs an important part of any long term investment portfolio. This also includes retirement investment portfolios like 401K investments and IRA investments. Historically, large cap growth stocks/ETFs tend to outperform in low interest rate scenarios, like the current one.

This out-performance can be clearly seen when we compare U.S. large cap growth ETFs to other asset classes worldwide. In the last financial year, U.S. large cap growth ETFs have outperformed all asset classes, with the exception of gold and some treasuries. Please check the tables below for more information.

Major Asset Classes Trend

11/15/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Gold

GLD

-0.1%

7.12%

-0.32%

19.77%

32.37%

11.77%

US Stocks

VTI

-1.42%

3.24%

5.83%

-5.14%

9.84%

2.47%

US Credit Bonds

CFT

-0.79%

0.85%

1.19%

3.69%

7.14%

2.41%

Total US Bonds

BND

-0.12%

0.85%

0.73%

4.12%

6.06%

2.33%

Commodities

DBC

-1.72%

1.56%

-3.48%

-2.37%

14.26%

1.65%

International Treasury Bonds

BWX

-2.03%

-1.21%

-3.94%

0.22%

5.65%

-0.26%

Emerging Market Stks

VWO

-3.48%

3.33%

-3.71%

-13.25%

-6.58%

-4.74%

International Developed Stks

EFA

-3.63%

-1.76%

-4.88%

-14.67%

-6.84%

-6.36%

US Equity Style Trend

11/15/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Russell Largecap Growth

IWF

-1.06%

2.79%

6.19%

-2.59%

11.07%

3.28%

Russell Smallcap Growth

IWO

-1.59%

5.4%

6.56%

-8.06%

10.01%

2.46%

Russell Largecap Index

IWB

-1.33%

3.09%

5.7%

-4.97%

8.61%

2.22%

Russell Midcap Growth

IWP

-1.38%

3.81%

5.42%

-7.56%

9.94%

2.05%

Russell Midcap Indedx

IWR

-1.67%

3.98%

5.08%

-8.13%

8.04%

1.46%

Russell Smallcap Index

IWM

-1.72%

4.84%

5.8%

-8.88%

6.52%

1.31%

Russell Midcap Value

IWS

-1.94%

4.28%

4.86%

-8.8%

7.3%

1.14%

Russell Largecap Value

IWD

-1.75%

3.09%

5.08%

-7.47%

6.08%

1.01%

Russell Smallcap Value

IWN

-2.0%

4.33%

5.08%

-9.77%

2.88%

0.1%

For more information on the performance of various asset classes, see here.

As we can see, U.S. equity ETFs have significantly outperformed most asset classes and within U.S. stocks, the large cap growth ETFs have shown clear outperformance. Let us now take a closer look at some U.S. large cap growth ETFs.

U.S. Large Cap Growth

11/11/2011

Description

Symbol

1 Yr

3 Yr

5 Yr

Avg. Volume(K)

1 Yr Sharpe

PowerShares QQQ

QQQ

9.19%

25.16%

6.66%

77,822

63.3%

iShares S&P 500 Growth Index

IVW

8.32%

16.94%

2.09%

878

54.23%

iShares Russell 1000 Growth Index

IWF

7.53%

18.86%

3.04%

3,795

45.62%

Vanguard Growth ETF

VUG

7.37%

17.89%

2.65%

541

43.53%

For more on ETFs linked to different asset classes, see here.

From the data in the above table, QQQ has the highest average daily volume (77,822k), the best returns (9.19% - 1 Yr.) and the highest Sharpe ratio (63.3%). This makes QQQ the best U.S. large cap growth ETF from the list. QQQ is an ETF which tracks the Nasdaq-100 Index®. It has a current asset value of $21.25 billion.

The following tables help us take a closer look at QQQ’s core holdings and sector allocation.

Top 10 Holdings (59.88% of Total Assets)

Company

Symbol

% Assets

Apple Inc.

AAPL

15.01

Microsoft Corporation

MSFT

8.86

Oracle Corporation

ORCL

6.18

Google Inc.

GOOG

5.55

Intel Corporation

INTC

4.76

Intel Corporation

INTC

4.71

Amazon.com, Inc.

AMZN

4.17

Cisco Systems, Inc.

CSCO

3.62

Cisco Systems, Inc.

CSCO

3.55

QUALCOMM Incorporated

QCOM

3.47

Sector Weightings (%)

Sector

QQQ

Basic materials

0.32

Consumer cyclical

13.64

Financial services

0.00

Realestate

0.00

Consumer defensive

3.24

Healthcare

10.51

Utilities

0.00

Communication services

4.68

Energy

0.00

Industrials

4.22

Technology

63.39

QQQ’s massive outperformance can be explained by the fact that 63% of its total assets are invested in large cap bellwether technology companies. Some examples include Apple (15.01%), Microsoft (8.86%), Oracle (6.18%) and Google (5.55%). This over-reliance on a single sector (technology – 63.39%) is a mixed blessing, which can lead to pronounced outperformance when the market is going up and significant underperformance during downtrends. It can also lead to major problems if the sector in question (technology) is re-rated negatively in the future. Consequently, investment in QQQ must be hedged by investing in value ETFs, or debt related ETFs like U.S. total bond ETFs etc.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: U.S. Large Cap Growth: Riding With The Big Boys