Companies come in all market-capitalization sizes. Large cap, mid cap, and small cap are the most common size designations, and there are many exchange-traded funds (“ETFs”) targeting these categories. However, size delineations do not stop there. Micro-cap ETFs address the lower end of the spectrum, but today we are diving into the other extreme. Mega-cap ETFs go after the largest of the large companies. There are 11 ETFs in the U.S. Mega-Cap category of the 2017 ETF Field Guide, and they are the focus of this review.

The S&P 500 Index is the most prominent benchmark for U.S. large-cap stocks. According to Morningstar, its 500 constituents have an average market capitalization of $93 billion. Many of the stocks in the S&P 500 are, in fact, mega-cap stocks, but how many of them receive that designation? Is it the 200 largest, the 30 largest, or somewhere in between? The answer is “all of the above”—it depends on who is responding to the question.

The following table of ETFs in the U.S. Mega-Cap category is sorted by the average market capitalization of their holdings. As you would expect, for ETFs using a traditional market-capitalization weighting scheme (shaded in blue), the smallest quantity of stocks produces the largest average capitalization. There are also mega-cap ETFs with alternative weighting schemes, including two equal-weighted funds (at the bottom of the list); the SPDR Dow Jones Industrial Average ETF (DIA), which uses a price-weighting scheme; and the additional filters applied to the “growth” and “value” mega-cap subsets.

U.S. Mega-Cap ETFs May 2017

The four capitalization-weighted mega-cap ETFs are listed below. All have Apple (AAPL) as their largest holding, and each fund’s allocation to Apple is included for comparison.

  • Guggenheim S&P 500 Top 50 (XLG): Launched in May 2005, this ETF formerly tracked the 50 largest stocks in the Russell universe but switched its index provider to S&P in January 2016. Russell uses a strict capitalization-weighting methodology in selecting its constituents, while a committee selects the stocks included in the S&P 500 Index. The ETF has $651 million in assets, 8.0% in AAPL, and an expense ratio of 0.20%.
  • iShares S&P 100 (OEF): Launched in October 2000, this ETF has the longest track record and highest trading activity of the four, while tracking the 100 largest stocks in the S&P 500 Index. It has $4.7 billion in assets, 6.2% in AAPL, and an expense ratio of 0.20%.
  • iShares Russell Top 200 (IWL): Launched in September 2009, this ETF tracks the 200 largest stocks in the Russell universe. It has $110 million in assets, 5.1% in AAPL, and an expense ratio of 0.15%.
  • Vanguard Mega Cap (MGC): Launched in December 2007, this ETF formerly tracked the MSCI US Large Cap 300 Index but switched to the CRSP Mega Cap Index in January 2013. The index targets the top 70% of U.S. investable market capitalization and therefore has a variable quantity of constituents. It currently has 276 stocks, $1.3 billion in assets, 4.0% in AAPL, and an expense ratio of 0.07%.

Performance of these four ETFs is nearly identical for 3-year return, 5-year return, yield, standard deviation, and drawdown. All provide acceptable exposure to the mega-cap space, and selection comes down to a matter of personal preference. If mega-cap concentration is your goal, then the Guggenheim S&P 500 Top 50 (XLG) should be your top pick. If you are more concerned about minor differences in expense ratios, then Vanguard Mega Cap (MGC) is probably the best choice. If you are an active trader, then you should opt for the added liquidity of iShares S&P 100 (OEF) and avoid the lower liquidity of the iShares Russell Top 200 (IWL).

Equal-weighting changes the complexion of ETFs built from mega-cap stocks. The average market capitalization of the Guggenheim S&P 100 Equal Weight ETF (OEW) is just 57% that of iShares S&P 100 (OEF), despite holding the same 100 stocks. When the list expands to 200 stocks, the average market capitalization of PowerShares Russell Top 200 equal Weight (EQWL) drops to just $59 billion, which is much lower than all of the other ETFs in this category and below the $93 billion of SPDR S&P 500 (SPY). Although EQWL holds only mega-cap stocks, its weighting scheme pushes it far down the capitalization scale. Depending on market behavior, this can be either beneficial or detrimental.

If you want to focus on just the growth or value subsets of mega-cap stocks, then both Vanguard and iShares provide ETFs that accomplish this task. Last but not least, no discussion of mega-cap ETFs would be complete without mentioning the SPDR Dow Jones Industrial Average ETF (DIA). While the S&P 500 might be the world’s most widely “followed” index, the Dow is the world’s most “famous” index. Composed of just 30 stocks, the Dow (and DIA), use a price-weighting scheme. While that may seem odd, it is just another way of saying it is an equal-share-quantity portfolio. This approach made it easy in the 1800s to just add the prices from a single share of every stock in the index and then divide by the number of stocks to derive the index value. A stock with a value of $100, therefore, has five times the weighting of a stock with a $20 price—not the way most people would build a portfolio today.

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.