Large Caps with Small Differences

More capital by far goes into large cap ETFs than any other asset class. Subtle differences are magnified by the sheer size of positions in most portfolios, so it pays for investors to examine large cap ETFs closely.SPDR S&P 500 (AMEX:SPY - News) handles an astounding $91 Billion, while iShares S&P 500 ETF (NYSEArca:IVV - News) runs $27 Billion. These two funds alone account for about 10% of all ETF assets. Both charge a paltry 0.09% in annual fees.The main decision by large cap investors is whether to follow the popular S&P 500 format. One alternative is Vanguard's Large Cap ETF (NYSEArca:VV - News), with 0.12% fees. It follows the MSCI US Prime Market 750 Index, which throws some mid-sized companies into the mix. SPDR Dow Jones Wilshire Large Cap ETF (AMEX:ELR - News) also follows about 750 companies at 0.23% annual cost. The main attraction of these is to avoid fallout from additions and deletions to the S&P 500, which can cause a stock to swing as index funds buy or sell it. Arbitrageurs commonly jump ahead of these trades, always to the detriment of the funds.In practice, large cap ETF returns correlate heavily:

For buy-and-holders investors, Vanguard's VV and IVV are the clear choice due to low expenses. For investors cycling in and out at least once a year, S&P's SPY is superior because its huge size drives bid-ask spreads down to minute levels, saving investors money. With options this liquidity advantage is even more pronounced.Clearly large cap ETFs are a bet on the US economy, and by Summer of 2011 it was clear that the recovery was slowing down. Q1 GDP growth slowed to an annualized 1.8% rate, and analysts downgraded corporate earnings forecasts. Goldman Sachs, for instance, revised its S&P 500 forecast to 10% in 2011 and 8% in 2012. It expected profit margins to peak in 2011, but predicted earnings would continue to rise.There are other ways to constrain or stretch the large cap definition. The iShares S&P 100 ETF (NYSEArca:OEF - News) targets only mega-cap companies, while the iShares Russell 1000 ETF (NYSEArca:IWB - News) takes in some mid-cap firms. Larger firms are far more likely to have international subsidiaries earning foreign currency than smaller ones, so they have an inherent currency hedge against a falling dollar. Also, the largest firms tend to diversify their exposure to other economies and should suffer less from US debt woes. By the same token, they are less likely to benefit from a sharp upswing in the US economy as smaller, more domestic-oriented firms. Picking the appropriate ETF is a matter of judging the current state of economic cycles.Low fees are always welcome, and over time even a modest difference adds up. For example, an extra 0.10% annually will lower returns about 1.3% after ten years, all else being equal. It is enough to start taking notice if a substantial portion of a portfolio is deployed to large cap.Other ETF plays on large cap include various using fundamental financial ratios to filter out and select companies deemed to be more attractive:

• PowerShares Dynamic Large Cap Growth Portfolio ETF (AMEX: PWB - News); 0.6% annual fees
• PowerShares Dynamic Large Cap Portfolio ETF (AMEX:PJF - News); 0.6% annual fees
• PowerShares Dynamic Large Cap Value ETF (AMEX:PWV - News); 0.6% annual fees
• RevenueShares Large Cap ETF (NYSEArca:RWL - News); 0.54% fees
• WisdomTree LargeCap Dividend ETF (NYSEArca :DLN - News); 0.28% fees
• ELEMENTS SPECTRUM Large Cap US Sector ETN (NYSEArca:EEH - News); 0.75% fees
• First Trust Large Cap Core AlphaDEX ETF (NYSEArca:FEX - News); 0.7% fees

There are also some large cap ETFs which allow for style investing, or weighting towards growth or value:

• SPDR Dow Jones Wilshire Large Cap Growth ETF (AMEX:ELG - News); 0.2% fees
• SPDR Dow Jones Wilshire Large Cap Value ETF (AMEX:ELV - News); 0.2% fees
• iShares Morningstar Large Core ETF (NYSEArca:JKD - News); 0.2% fees
• iShares Morningstar Large Growth ETF (NYSEArca:JKE - News); 0.25% fees
• iShares Morningstar Large Value ETF (NYSEArca:JKF - News); 0.25% fees
• Then there are ETFs which combine fundamental and style investing:
• Claymore Great Companies Large-Cap Growth ETF (AMEX:XGC - News); 0.6%
• ELEMENTS Benjamin Graham Large Cap Value Total Return ETN (NYSEArca:BVL - News); 0.75%
• First Trust Large Cap Growth Opportunities AlphaDEX ETF (NYSEArca:FTC - News); 0.7%
• First Trust Large Cap Value Opportunities AlphaDEX ETF (NYSEArca:FTA - News); 0.7%
• Grail American Beacon Large Cap Value ETF (NYSEArca:GVT - News); 0.79%
• Wisdom Tree Large Cap Growth ETF (NYSEArca: ROI - News); 0.38%

Finally there are the traders' vehicles, suitable only for speculative bets over short time periods:

• Direxion Large Cap Bear 3x Shares ETF (NYSEArca:BGZ - News); 0.95%
• Direxion Large Cap Bull 3x Shares ETF (NYSEArca:BGU - News); 0.95%

Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.