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ETF Spotlight: Vanguard Mega Cap

tlydon@globaltrend.com (Tom Lydon)

Vanguard Mega Cap Index 300 ETF (MGC - News) can be used as a core holding in a diversified portfolio, or fill in as a large cap holding. Whatever an investor uses it for, the fund features low fees and stable performance, a key characteristic in today’s uncertain market.

“MGC is an ideal core equity holding because of its low-cost, indexed-based approach. Its underlying stocks are widely diversified across both sectors and the value-growth spectrum. This fund is particularly well-suited for those seeking to precisely control their market-cap exposure,” Michael Rawson, CFA, wrote in a recent Morningstar article. [Using ETFs to Build a Diversified Portfolio]

Earnings in U.S. companies have held up despite the first quarter growth forecast projected lower to 1.9%, and the slower job growth recently reported. Also, slower growth in emerging economies and the European sovereign debt crisis continue to weigh on investor confidence. [Defensive ETFs for a Volatile Market]

However, analysts are expecting operating earnings on S&P 500 stocks to hit $105 in 2012, putting the S&P 500 at an attractive forward price/earnings ratio of 12.5 times. The 2.4% dividend yield on the stocks in this portfolio is higher than the 1.6% yield on the 10-Year U.S. Treasury Note, reports Rawson. [ETF Chart of the Day: Mega-Caps]

Furthermore, dividend yields are more attractive than intermediate term bond yields, which will give stocks a better valuation compared to bonds. The lower volatility that mega caps posses also make a case for investing in a fund such as MGC. MGC currently has about $393 million in AUM, with a yield of 1.89%.

MGC holds nearly 90% of the S&P 500 by market capitalization, and covers the entire large-cap class, with a few mid-caps thrown in. About 57% of the index is dedicated to large-caps. The 0.12% expense ratio is a bargain relative to the large-cap companies that are represented in the index.

Vanguard Mega Cap Index 300 ETF

Tisha Guerrero contributed to this article.