5 Reasons To Be Increasing Your Large Cap Exposure Right Now
Spencer Israel , Benzinga Staff Writer
July 12, 2017 11:50am
Have you heard? The market’s in a bit of an uptrend as of late. The major averages—Dow Jones, S&P 500, and Nasdaq Composite—are all at or near all-time highs.
Depending on whom you ask, the reason for this rally varies. It could be a continued reaction to the election of Donald Trump, and the market hoping he’ll accomplish his agenda. Or maybe it’s because of the Federal Reserve, which just raised rates for the third time since 2015. It could even be due to an interplanetary alignment.
Regardless of why the market is in rally mode, investors aren’t complaining—especially large-cap investors. The S&P 500 is up 9.5 percent since January 1, 2017. That’s 50 percent more than the S&P Midcap 400 (up 6.12 percent) and more than double the small-cap Russell 2000 (up 4.23 percent).
The period has also been a boon for large-cap ETFs, such as the O’Shares FTSE U.S. Quality Dividend ETF, as investors have scrambled to diversify across the asset class.
OUSA invests in large-cap dividend stocks, and investors have added over $42 million in assets to the fund this year alone. This recent inflow of investment has been a common theme for large-cap ETFs during this rally, as funds like the PowerShares S&P 500 Hgh Qlty Prtfl ETF and the Vanguard Mega Cap ETF have seen similar buying activity in 2017.
In case you’re not on the buying train right now, here are five reasons you may want to consider adding to your large-cap exposure right now.
Data shown from 1/1/2017-6/19/2017. S&P500 (SPX) vs Russell 2000 vs S&P MidCap 400
Minimize the impact of volatility
We’re clearly operating in a low volatility environment. With the volatility index at all-time lows, some investors may want to consider the impact that an—even slightly—more volatile environment could have on their portfolio. In the world of equity investing, large-cap stocks are historically more immune to spikes in volatility than their low-and mid-cap counterparts.
The last time the CBOE Volatility Index rose above 16, in November 2016, the S&P 500 fell about 3.2 percent, while the S&P 400 fell nearly 3.7 percent and the Russell 2000 fell 6.5 percent.
They Often Pay Dividends
Large-cap stocks typically operate diversified businesses in established industries, which leads to strong cash flows. With all that cash, it’s common for stocks to pay out dividends to their investors as an incentive for holding the stock.
Dividends are essentially a second income stream for investors on top of any capital gains. Large-cap dividend stocks are considered safe havens, though still have substantial risks, for investors because they may provide income even when stocks aren’t appreciating in value. Stocks like Pfizer Inc., Philip Morris International Inc., and Procter & Gamble Co have historically offered dividends yields of at least 3 percent.
Large-Cap Stocks Are Dominating The Market
In early June, a note from Goldman Sachs temporarily sent the tech sector spiraling by comparing today’s largest tech companies—Facebook Inc., Amazon.com, Inc., Apple Inc., Microsoft Corporation and Alphabet Inc. —to the dotcom bubble.
While the comparison isn’t quite apt (valuation ratios aren’t nearly as high as they were in the early 2000’s), the underlying sentiment is a common one: the market is driven by large-cap stocks. Those five stocks alone added over $660 billion in market cap in the first half of 2017.
As these tickers continue to drive higher, investors hoping to get in on outsized returns are piling into large-cap stocks.
Large-Cap Stocks Are Historically More Resistant To Downturns
While no investment is immune from drawdowns, few asset classes have shown historical resilience like large-cap stocks; especially for equity investors. The sheer size of these companies is enough to allow them to potentially overcome near-term headwinds, such as a shift in the business cycle or an economic downturn. These companies tend not to carry a lot of debt—at least compared to many small-and mid-cap stocks—and are therefore less exposed to catastrophic balance sheet events.
Strong Earnings Growth
Earnings for the S&P 500 is estimated to have grown by 6.5 percent in the second quarter of 2017, according to data from FactSet. This marks the third quarter in a row that large-cap stocks have posted positive earnings growth, a sharp shift away from the previous trend of seven straight quarters of negative earnings growth dating back to March 2015.
Of course, past performance does not equal future results, but the first half of 2017 made large-cap investors some of the happiest on Wall Street.
Or, to shortcut the arduous process of stock picking, investors can examine any number of large-cap stock ETFs, like any of the ETFs mentioned above.
O’Shares Investments is an editorial partner of Benzinga. We collaborate on stories that are educational, or that we think you will find interesting.
Image credit: Wikimedia Commons
© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
O’Shares FTSE US Quality Dividend ETF: OUSA holdings include: Pfizer Inc. (NYSE:PFE), 2.87%; Philip Morris International Inc. (NYSE:PM), 3.19%; Procter & Gamble Co (NYSE:PG), 3.52%; Apple Inc. (NASDAQ: AAPL), 5.37%; and Microsoft Corporation (NYSE: MSFT), 3.96%. Data as of 5/31/2017.
Before you invest in O’Shares Investments℠ funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, unless perfectly hedged, the Fund’s investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund’s returns. The funds' hedging strategies may not be successful, and even if they are successful, the funds' exposure to foreign currency fluctuations is not expected to be fully hedged at all times. See the prospectus for specific risks regarding the Fund.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns.
O’Shares Investments℠ funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares Investments℠ or any of its affiliates.