At the core of many investor portfolios is an allocation to large cap, U.S.-listed equities. With market capitalizations usually exceeding $10 billion, large cap stocks generally have long operating histories, stable operations, and large amounts of cash on hand, making them less risky investments than small and mid cap firms. Moreover, although domestic large caps are headquartered in the U.S., they are often multinational companies that generate significant portions of revenue and earnings from overseas, providing some degree of geographic diversification with the efficiency and liquidity that comes with U.S. exchanges.
One of the most widely-followed benchmarks in the world is the S&P 500, a collection of the 500 largest publicly-traded U.S. companies (with a few exceptions). And one of the most popular ways to gain exposure to the companies included in this index is the SPDR S&P 500 ETF (NYSEARCA:SPY). SPY is one of the largest and most heavily-traded ETFs in the world, and with good reason. Its diversified holdings (500 individual securities) and low costs to investors (expense ratio of just 0.09%) make it an attractive option for investors looking to build their portfolios around a base of large cap stocks.
But SPY isn’t the only option for gaining large cap equity exposure through ETFs. In fact, several funds targeting the same asset class have outperformed SPY so far this year.
- ProShares Credit Suisse 130/30 (NYSEARCA:CSM): This ETF offers a similar risk and return profile to SPY, but applies a 130/30 strategy in an attempt to generate excess returns over the S&P 500. Such an investment strategy involves taking a 100% long position in a benchmark (in this case the S&P 500), shorting 30% of the portfolio expected to deliver the lowest returns, and using the proceeds to “double down” on the stocks expected to deliver the strongest performance. Since its launch in July CSM is up 22.0%, while SPY is up about 21.5% over the same period (read more about the 130/30 strategy here).
- Rydex S&P Equal Weight ETF (NYSEARCA:RSP): This ETF offers exposure to the same companies that make up the S&P 500, but eliminates the bias towards mega-cap firms by weighting each component equally (i.e., each of the 500 stocks makes up 0.20% of the fund after rebalancing). Some investors lament that a market capitalization-weighting methodology will overweight overvalued companies and underweight those trading at less than their intrinsic value, a problem addressed by giving equal allocations to each index component. As smaller S&P 500 stocks have outperformed mega-caps like Exxon (NYSE:XOM) and Microsoft (NASDAQ:MSFT), RSP has outperformed SPY by a wide margin in 2009, adding about 38% so far in 2009 compared to 22% for SPY.
- iShares KLD 400 Social Index Fund (NYSEARCA:DSI): This socially-responsible ETF may not sound like a traditional large cap equity fund, but it holds many of the same stocks that are found in the S&P SPDR. DSI is based on an index constructed to include stocks with positive environmental, social, and governance (ESG) characteristics. Companies with involvement in the alcohol, tobacco, firearms, nuclear power, and gambling industries (among others) aren’t eligible for inclusion. But this filter certainly hasn’t eaten into the fund’s returns: DSI is up about 25% in 2009, putting it about 300 basis points ahead of SPY.
- Claymore/Zacks Sector Rotation ETF (NYSE:XRO): The index underlying this ETF utilizes a proprietary quantitative methodology to overweight sectors with potentially superior risk-adjusted returns, with the goal of outperforming the S&P 500 and other benchmarks. In 2009, XRO has accomplished this goal, outperforming SPY by about 250 basis points. XRO’s sector allocations have changed significantly in 2009, but the costs associated with more active reallocations were more than offset by the alpha generated.
- First Trust Large Cap Core AlphaDEX (NASDAQ:FEX): The index underlying this ETF uses the AlphaDEX stock selection methodology to pick stocks from the S&P 500 based on rankings in number of growth and pricing factors. Stocks ranking in the bottom quartile are eliminated, and the top 75% are weighted equally. The results in 2009 have been quite impressive: FEX has gained 31%, making it one of the best performers among Large Cap Equities ETFs.
As evidenced by its popularity among investors, SPY is an excellent exchange-traded product that fulfills a vital role in millions of portfolios. But being the biggest doesn’t always mean being the best. While there’s no guarantee that these five ETFs will continue to outperform S&P 500-based funds in coming months and years, their performance in 2009 has shown that they’re at least worthy of a look when investors allocating holdings across asset classes and investment styles.
Disclosure: No positions at time of writing.