Big Stocks Drive Market Rally, These ETFs

ETF Trends

It is one of the most hated rallies in recent memory, but U.S. stocks keep climbing. The S&P 500 posted a decent gain in May, the start of the worst six-month period for stocks. This month the benchmark U.S. index is higher by nearly 1% this month. Remember that June is usually one of the worst months for U.S. equities.

The SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) touched all-time highs Thursday while the PowerShares QQQ (QQQ) hit a new 52-week high. The iShares Russell 2000 ETF (IWM) did not reach a new high, a sign that this rally has been sparked by large- and mega-cap stocks. [Returning to Small-Cap ETFs]

Some mega-cap ETFs confirm as much. Over the past 90 days, the S&P 500 is up 3.5%, but the Guggenheim Russell Top 50 Mega Cap ETF (XLG) is higher by 4% over the same time and also hit a new all-time Thursday.

As its name implies, XLG is comprised of the 50 largest stocks in the Russell 3000 Index. XLG currently holds 52 highly familiar, widely held stocks. Although the ETF’s almost 17% weight to financial services stocks could be seen as a hurdle given that sector’s recent struggles, XLG has benefited from its technology and energy allocations.

Those sectors combine for 36% of the ETF’s weight. When talking mega-cap tech, that usually means a conversation about the sector’s more mature, less volatile companies. Those names include Apple (AAPL), Microsoft (MSFT) and Oracle (ORCL), which have been the key contributors to recent upside for cap-weighted tech ETFs. [New Highs for Old Tech ETF]

The Vanguard Mega Cap ETF (MGC) has also slightly outperformed the S&P 500 over the past 90 days. With an expense ratio of just 0.11%, MGC is less expensive than 90% of rival funds, according to Vanguard.

Home to 302 stocks, MGC has a deeper bench than XLG. The Vanguard offering is underweight tech (16.7%) and overweight financials (17.5%) compared to the S&P 500.

The Vanguard Mega Cap Value ETF (MGV) is another mega-cap ETF idea to consider. MGV’s 4.6% jump over the past three months shows the ETF has a beneficiary of investors flocking to value over momentum. [Don't Forget These Value ETFs]

MGV’s top-10 holdings comprise 31.6% of the ETF’s weight compared to 20.6% in MGC. Other differences between the two Vanguard funds include MGV holding 156 stocks and an 8.1% tech weight. Mega-cap value in MGV comes by way of a 21.8% weight to financials and a combined 25.3% weight to the energy and industrial sectors.

Guggenheim Russell Top 50 Mega Cap ETF

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Tom Lydon’s clients own shares of Apple, Microsoft, QQQ and SPY.

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