What is a large cap ETF? | Learn more

ETFs are among the most popular investment products on the market today, one of which is large cap ETFs. These funds track the performance of the largest publicly traded companies, providing investors with low risk exposure to the pillars of the market. And, with a significant number of large cap ETFs To choose from, investors have their choice of strategy when it comes to how they interact with the darlings of the market.

The goal of large cap ETFs is to provide stability, while growing your investment at a rate above inflation. While large-cap ETFs won’t experience the growth that blended funds will experience, they are exactly what many investors expect from their long-term holdings: predictability. And, with low expense ratios and low fees, these are the ultimate investments to set and forget.

Here’s a more in-depth look at large-cap ETFs, how they work, and some of the benefits of investing in them over other types of ETFs.

Definition of large cap ETFs

To understand the purpose of a large cap ETF, investors must first understand the concept of market capitalization. Assets tracked by a large cap fund will generally have a market capitalization greater than $ 10 billion. Mega-cap companies are also taken into account: these are companies with an individual market capitalization exceeding $ 200 billion.

For an ETF to be a “large cap” fund, the majority of its assets must be large or mega cap stocks. Many ETFs allocate 75% and above, and the 85% large cap allocation is a number you will often see when valuing different ETFs. To know the specific distribution of companies, check the allocation of the fund before investing.

The best through performance

There are plenty of large cap ETFs to choose from. Fortunately, they each have key differentiators that make them different. It is best to think of an ETF as a basket of stocks. While each large-cap ETF may contain a basket of large-cap companies, the allocation differs from one ETF to another. Here are some examples of the most successful:

Readers will notice that most of these ETFs track the S&P 500 as the underlying index. This makes sense, since the S&P 500 is a market capitalization weighted index encompassing the 500 largest companies in the market. Not all large cap ETFs track the S&P 500 Index; however, it is a convenient benchmark for many large cap funds.

ETFs make blue chip stocks accessible

While most investors can name the largest public companies, they may not always be able to invest in them. These companies tend to have significantly higher stock prices due to their large market capitalization.

For example, Microsoft (Nasdaq: MSFT) is trading at over $ 300 per share. During this time, Netflix (Nasdaq: NFLX) is trading above $ 640 and Amazon (Nasdaq: AMZN) is trading at $ 3,500 per share. Retail investors who spend a few hundred dollars each month to invest may only be able to fragment stocks when buying outright.

ETFs allow investors to access large and large cap companies through a portfolio with a affordable share price. Instead of choosing between a few stocks of the major public companies, investors can own stocks of one ETF that tracks them all and enjoy their success as a whole.

Are these ETFs profitable?

One of the main drawbacks of large-cap ETFs is that large-cap companies are not above-market investments. In fact, they’re more representative of the average, as a lot of the major indexes are tied to large and mega-cap companies. For example, the 10 largest stocks represent about a third of the market value of the S&P 500 Index. If they are the average is hard to beat the average with them.

That said, large cap ETFs can be profitable over time. Their relative stability means waiting years to see returns above the market. Additionally, some dividend-focused ETFs have the power to become significant contributors to a passive income portfolio. Some large-cap growth and value funds also have above-market potential.

The main function of these ETFs is to fight inflation and restore shareholder value over a longer time horizon. They do it through low fees, constant price appreciation, low volatility and dividend payments. They might only speed up (or slightly overtake) the market, but they will exceed inflation rates to preserve and accumulate wealth.

The result on large cap ETFs

Like any investment product, a large cap ETF is not without risk. Large businesses are prone to bloating and can sometimes peak. Fortunately, the purpose of an ETF is to bring stocks together for overall performance: an uptrend and a right trend over a sufficiently long period of time.

For investors looking for relatively safe risk, there are large cap growth ETFs. For those looking for exposure to a portfolio of established players, a large cap general fund is often the best. Interested in creating passive income? Consider an ETF made up of dividend aristocrats, all of which are large or mega-capitalization companies. Whatever your investment strategy, if it involves the biggest companies in the market, there is an ETF to back it up.

ETFs can be a great way to diversify your portfolio. To start generating wealth for years to come, join the Freedom through wealth e-letter below. Market expert Alexander Green has helped guide both new and seasoned investors to the best investment opportunities he has discovered in over a decade.

While viewed more as a defensive investment, remember that large cap stocks are still stocks – they will appreciate and lose value like anything else. Keep this in mind when looking for large cap ETFs that leverage the strengths of your investment strategy.

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