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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

SCHX

Schwab U.S. Large-Cap ETF

0.08%

1.99

183774

74.2%

MGC

Vanguard Mega Cap 300 Index ETF

0.12%

2.02

180336

75.3%

VV

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%

VONE

Vanguard Russell 1000 Index ETF

0.12%

1.96

183462

74.7%

IWB

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 (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:

Ticker

Fund

Expense Ratio

Avg P/B

Avg Market Cap ($ Millions)

Safe

ADX

Adams Express

0.58%

1.72

126472

69.8%

NGZ

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

AAPL

Apple Inc.

Personal Computers

5.2

14.3

8.68

ACN

Accenture plc

Information Technology Services

10.76

16.46

5.75

ADI

Analog Devices Inc.

Semiconductor - Integrated Circuits

3.17

14.47

7.91

ALTR

Altera Corp.

Semiconductor - Specialized

4.38

17.33

8.08

AMAT

Applied Materials Inc.

Semiconductor Equipment & Materials

1.96

9.11

5.34

ATVI

Activision Blizzard, Inc.

Multimedia & Graphics Software

1.35

13.46

6.60

BBBY

Bed Bath & Beyond Inc.

Home Furnishing Stores

3.59

15.63

8.80

CAH

Cardinal Health, Inc.

Drugs Wholesale

2.44

15.31

5.60

CF

CF Industries Holdings

Agricultural Chemicals

2.74

9.67

3.29

CSCO

Cisco Systems, Inc.

Networking & Communication Devices

2.2

15.77

3.13

DELL

Dell Inc.

Personal Computers

3.8

9.49

3.55

ESRX

Express Scripts Inc.

Health Care Plans

11.84

20.62

7.25

FCX

Freeport-McMoRan Copper & Gold

Copper

2.66

9.19

3.63

FLR

Fluor Corporation

Heavy Construction

3.11

19.14

5.24

GPS

Gap Inc.

Apparel Stores

4.13

13.05

6.50

INTC

Intel Corporation

Semiconductor - Broad Line

2.98

11.18

5.74

LO

Lorillard, Inc.

Cigarettes

0

15.73

7.60

MCK

McKesson Corporation

Drugs Wholesale

2.67

15.79

4.81

MDT

Medtronic, Inc.

Medical Appliances & Equipment

2.5

12.49

3.51

MHP

The McGraw-Hill Companies

Publishing - Books

8.45

16.78

4.65

MHS

Medco Health Solutions

Drugs Wholesale

6.95

18.58

6.49

MO

Altria Group Inc.

Cigarettes

16.41

18.01

3.14

MSFT

Microsoft Corporation

Application Software

4.1

11.34

5.24

NOC

Northrop Grumman Corp.

Aerospace/Defense

1.47

8.02

3.06

ORCL

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.

Source: How To Gain Exposure To Large Cap Blend Investments