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:
Ticker | Fund | Expense Ratio | Avg P/B | Avg Market Cap ($ Millions) | Safe |
Schwab U.S. Large-Cap ETF | 0.08% | 1.99 | 183774 | 74.2% | |
Vanguard Mega Cap 300 Index ETF | 0.12% | 2.02 | 180336 | 75.3% | |
Vanguard Large Cap ETF | 0.12% | 1.99 | 180336 | 75.3% | |
STFGX | State Farm Growth | 0.12% | 2.11 | 128600 | 74.5% |
VLCAX | Vanguard Large Cap Index Adm | 0.12% | 1.99 | 180336 | 75.3% |
VLCSX | Vanguard Large Cap Index Signal | 0.12% | 1.99 | 180336 | 75.3% |
Vanguard Russell 1000 Index ETF | 0.12% | 1.96 | 183462 | 74.7% | |
iShares Russell 1000 Index | 0.15% | 1.91 | 183774 | 74.1% | |
BRLIX | Bridgeway Blue Chip 35 Index | 0.15% | 1.71 | 170068 | 80.5% |
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 (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 (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:
Ticker | Fund | Expense Ratio | Avg P/B | Avg Market Cap ($ Millions) | Safe |
Adams Express | 0.58% | 1.72 | 126472 | 69.8% | |
AGIC Global Equity & Convertible Income | 1.18% | 1.48 | 102781 | 70.00% |
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:
Ticker | Company | Industry | P/B | P/E | Altman Z-score |
Apple Inc. | Personal Computers | 5.2 | 14.3 | 8.68 | |
Accenture plc | Information Technology Services | 10.76 | 16.46 | 5.75 | |
Analog Devices Inc. | Semiconductor - Integrated Circuits | 3.17 | 14.47 | 7.91 | |
Altera Corp. | Semiconductor - Specialized | 4.38 | 17.33 | 8.08 | |
Applied Materials Inc. | Semiconductor Equipment & Materials | 1.96 | 9.11 | 5.34 | |
Activision Blizzard, Inc. | Multimedia & Graphics Software | 1.35 | 13.46 | 6.60 | |
Bed Bath & Beyond Inc. | Home Furnishing Stores | 3.59 | 15.63 | 8.80 | |
Cardinal Health, Inc. | Drugs Wholesale | 2.44 | 15.31 | 5.60 | |
CF Industries Holdings | Agricultural Chemicals | 2.74 | 9.67 | 3.29 | |
Cisco Systems, Inc. | Networking & Communication Devices | 2.2 | 15.77 | 3.13 | |
Dell Inc. | Personal Computers | 3.8 | 9.49 | 3.55 | |
Express Scripts Inc. | Health Care Plans | 11.84 | 20.62 | 7.25 | |
Freeport-McMoRan Copper & Gold | Copper | 2.66 | 9.19 | 3.63 | |
Fluor Corporation | Heavy Construction | 3.11 | 19.14 | 5.24 | |
Gap Inc. | Apparel Stores | 4.13 | 13.05 | 6.50 | |
Intel Corporation | Semiconductor - Broad Line | 2.98 | 11.18 | 5.74 | |
Lorillard, Inc. | Cigarettes | 0 | 15.73 | 7.60 | |
McKesson Corporation | Drugs Wholesale | 2.67 | 15.79 | 4.81 | |
Medtronic, Inc. | Medical Appliances & Equipment | 2.5 | 12.49 | 3.51 | |
MHP | The McGraw-Hill Companies | Publishing - Books | 8.45 | 16.78 | 4.65 |
Medco Health Solutions | Drugs Wholesale | 6.95 | 18.58 | 6.49 | |
Altria Group Inc. | Cigarettes | 16.41 | 18.01 | 3.14 | |
Microsoft Corporation | Application Software | 4.1 | 11.34 | 5.24 | |
Northrop Grumman Corp. | Aerospace/Defense | 1.47 | 8.02 | 3.06 | |
Oracle Corporation | Application Software | 3.48 | 15.91 | 4.87 |
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.
Conclusion
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.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
