Investing in Mega Caps

The Mega Cap stocks are the names you recognize on a daily basis. They range from Apple ($AAPL) to Exxon Mobil ($XOM) to Coca-Cola ($KO). Typically most investors have exposure to the mega caps through mutual funds in their 401k's while others may actually own the individual stocks.

In my opinion investors (outside of their 401k) are typically underinvested in the mega cap stocks because it is much "sexier" to own a smaller company with promises of big returns.

During a prolonged bull market, similar to what we are experiencing now, the mega caps will lag in the early stages as investors pour money into speculative stocks. As the bull market matures it leads to money flowing into all asset classes. As the bull market gets into its later years the shift moves from the small caps to the mega caps as investors look for more safety in fears the bull market may be closer to the end.

Another potential factor for the mega caps pulling in more money near the end of a bull market is that the type of investor entering the market near the top is the average retail investor that wants to invest in stocks they "know".

Below is a graph that shows the difference in returns between the mega cap stocks and small cap stocks during bull markets. The first quarter of a bull market has the small cap stocks greatly outperforming the mega caps, but by the last quarter the mega caps take a sizable lead.

The bottom line is that maybe it is time to look at the mega cap ETFs as the play for the next year?

Vanguard offers three mega cap ETFs: Growth ($MGK), Value ($MGV), and Composite ($MGC).

Here is a chart of the performance over the last three years with Value leading the way and Growth lagging. Time to look at Growth, especially with investors looking for big returns after sitting on the sidelines.