Advisors seeking perspective on mega-cap companies can learn from a firm that has committed years to understanding how to build a portfolio dedicated to these stocks, Principal Asset Management. Recently, Wealth Advisor Managing Editor Scott Martin sat down with Matt Cohen, Principal’s Director and Senior ETF Specialist, to discuss opportunities in the mega-cap exchange-traded fund (ETF) space.
Principal considers the top half of the S&P 500 by market valuation when evaluating mega caps, Cohen says. These largest names in the U.S. market boast robust balance sheets, sustainable earnings, substantial liquidity, and widespread brand recognition, making them an essential component of a well-constructed portfolio.
Cohen argues for strategically overweighting these quality names for their long-term performance while noting that many investors unintentionally underweight mega-cap companies when constructing their portfolios.
To address the need for exposure to mega-cap companies, Principal Asset Management launched the Principal U.S. Mega-Cap ETF (USMC) more than six and a half years ago. USMC provides investors with access to the top half of the S&P 500 by market valuation, consisting of 42 names, at a 12 basis point expense ratio. Cohen highlights the ETF’s simple yet sophisticated design, which assigns a market weighting to the top 10% of the portfolio—capturing the two top names, currently Apple and Microsoft—to avoid unintended risks by ensuring a balanced exposure without compromising on the influence of these market leaders. USMC equally weights the remaining companies, with tilts toward those with better financial strength and lower volatility, creating a diversified large-cap portfolio.
Cohen addresses a misconception among large-cap managers who often underweight mega-cap names in pursuit of alpha through lesser-known stocks. This strategy, while occasionally fruitful, neglects the consistent return and lower risk profile historically associated with mega-cap companies. This oversight could be remedied by integrating USMC into portfolios, thus realigning with a truly large-cap focus that eschews unnecessary ventures into the mid-cap territory.
Once deemed the high-growth, speculative bets of Silicon Valley, mega-cap companies have transitioned into the bedrock of financial stability and growth, often serving as the default choice in tumultuous market conditions. This transformation underscores the evolving dynamics within the investment landscape, where mega-cap names not only provide a bulwark against volatility but also contribute to dividend yields, further enhancing their appeal. Cohen emphasizes that the USMC ETF offers diversification and includes a dividend component, making it attractive to investors seeking both quality and growth. The inclusion of dividend-paying mega-cap stocks adds durability to the portfolio, aligning with the current market demand for quality names.
Regarding the practical application of USMC for advisors who would want to understand how it fits within broader portfolio strategies, Cohen outlines a dual utility for this ETF: as a tool for fee optimization and as a core/satellite component ensuring adherence to a large-cap mandate. This adaptability, coupled with a focus on quality and growth, positions USMC as an essential element in modern portfolio construction, catering to a wide array of investment objectives and risk profiles.
Cohen reaffirms the importance of mega-cap investments for both risk management and consistent returns. The emphasis on quality, coupled with a pragmatic approach to portfolio construction, provides a valuable blueprint for advisors seeking to enhance their offerings in an increasingly competitive landscape.
Principal Asset Management’s focus on mega-cap stocks and the availability of the USMC ETF underscore the firm’s commitment to providing investors with diversified and quality investment solutions. As the market continues to evolve, Principal aims to assist advisors in navigating the ever-changing investment landscape with innovative and reliable offerings.
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Asset allocation and diversification do not ensure a profit or protect against a loss. Investing in ETFs involves risk, including possible loss of principal. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Investor shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Ordinary brokerage commissions apply.
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The company names listed are for illustrative purposes only and do not constitute a recommendation to buy, hold, or sell any security product.
Equity investments involve greater risk, including heightened volatility, than fixed income investments.
Unlike passive ETFs, there are no indices that Principal U.S. Mega-Cap ETF (USMC) attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager.
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