What is the best way to gain exposure to large cap blend stocks? Several commendable choices were found among low-fee open-end mutual funds and exchange-traded funds (ETFs) in the large cap blend category. Retail investors should consider direct investment in large cap blend stocks as another way to gain exposure to these equities. Furthermore, retail investors who have longer time horizons ought to consider a discounted closed-end fund alternative for large cap blend exposure.
ETF and Open-End Mutual Fund Evaluation
Investors seeking exposure to large cap blend stocks have many funds to choose from. They should select funds using the following criteria:
Low expense ratios. The less that investors pay in fund-level fees, the more they keep.
Holdings with appropriate price-to-book ratios. These funds should have a mid-range price-to-book ratio average for the portfolio. P/B ratios are provided by Morningstar.com.
Holdings with large cap market capitalizations. These funds should hold large cap firms to gain the expected exposure. Each fund's top 25 holdings was used to compute an average market cap as a basis of comparison between funds.
Financially strong holdings. Funds should be biased towards stocks with stronger financial positions that can weather bad times. Funds with more holdings which score as "safe" according to the Altman Z-score metric are preferable to funds with weaker holdings.
A collection of large cap blend funds with expense ratios under 0.25% were evaluated based on their holdings. Key attributes of these funds and their holdings are listed below:
Avg Market Cap ($ Millions)
Schwab U.S. Large-Cap ETF
Vanguard Mega Cap 300 Index ETF
Vanguard Large Cap ETF
State Farm Growth
Vanguard Large Cap Index Adm
Vanguard Large Cap Index Signal
Vanguard Russell 1000 Index ETF
iShares Russell 1000 Index
Bridgeway Blue Chip 35 Index
These funds are all acceptable ways to invest in large cap stocks. Of these funds, SCHX is notable because of its exceptionally low fees and BRILX is notable because of its greater fraction of "safe" holdings.
Quick, Easy, and Better Large Cap Core
Another method for gaining large cap core exposure was discovered in a prior article which reviewed closed-end funds trading at a discount. Adams Express (NYSE:ADX) is a closed-end fund that trades at a 14.34% discount and pays a 4.55% distribution yield. AGIC Global Equity & Convertible Income (NYSE:NGZ) is another closed-end fund that trades at a 9.40% discount and pays an 8.30% distribution yield. These funds contain a mix of stocks which average out to a large cap blend with an acceptable fraction of safe Altman Z-scores:
Avg Market Cap ($ Millions)
AGIC Global Equity & Convertible Income
Investors could also consider investing in large cap stocks directly as an alternative to investing through low-fee ETFs and open-end mutual funds. Here is a list of large cap stocks selected by Greenblatt's Magic Formula that also qualify as "safe" using the Altman Z-score:
Information Technology Services
Analog Devices Inc.
Semiconductor - Integrated Circuits
Semiconductor - Specialized
Applied Materials Inc.
Semiconductor Equipment & Materials
Activision Blizzard, Inc.
Multimedia & Graphics Software
Bed Bath & Beyond Inc.
Home Furnishing Stores
Cardinal Health, Inc.
CF Industries Holdings
Cisco Systems, Inc.
Networking & Communication Devices
Express Scripts Inc.
Health Care Plans
Freeport-McMoRan Copper & Gold
Semiconductor - Broad Line
Medical Appliances & Equipment
The McGraw-Hill Companies
Publishing - Books
Medco Health Solutions
Altria Group Inc.
Northrop Grumman Corp.
Investors could buy these stocks to create a portfolio consisting entirely of "safe" stocks. This would require 25 separate trades, so this strategy would only be cost effective for investors with large amounts of capital in brokerage accounts with low trading fees.
There are many large cap blend investment vehicles available to retail investors which are recommended. Low fee ETFs and mutal fund, closed-end funds trading at discounts, and direct investment in stocks which meet the criteria for "safe" Altman Z-scores and rank high using Greenblatt's Magic Formula are all recommended ways for retail investors to gain large cap core exposure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Please read the article disclaimer.