ETF Expert

With the Dow, S&P 500 and Nasdaq all putting the big hurt on smaller companies in 2007, you’re going to want large company exposure going forward. Small-caps may have led the way through the first 6 years of this decade, but large-caps have been leading since the 2006 correction. That’s nearly 18 months of superior performance.

You may even want to go a step further; specifically, value has outpaced growth for those 6 years, giving an investor reason to tilt towards growth in Q4, 2007. For the time being, however, let’s stay in the sweet spot between value and growth: large-cap blend investing.

You’ll want your ETF to trade more than 100,000 daily… for better price execution. You’ll want your ETF to track an index that is both stable and well-known. You’ll want low cost of ownership vis-a-vis the expense ratio. And, most of all, you’re going to want the best performance that the large-cap world has to offer.

In truth, I usually defer to the Mac-Daddy of spiders, the S&P 500 SPDR Trust (SPY). The ease of trading is unparalleled. Its representation of U.S. market performance is unquestioned. In fact, if one needs a core holding in the large-cap blend space, why would you even think about looking elsewhere?

I might not have given this question a second thought… until recently. Then I returned to my basic thesis about large company stock exposure. I want the largest companies from both the bargain bin and the growth camp. So… which index best suits my needs?

In truth, there were 3 that I deemed worthy of consideration:

1. iShares Russell 1000 (IWB)
2. S&P 500 SPDR Trust (SPY)
3. iShares S&P 100 (OEF)

It turns out that the Russell 1000 had the best performance over the last 5 years, followed closely by the S&P 500. Meanwhile, the S&P 100 lagged a fair distance behind. In fact, over the 5 years, the iShares Russell 1000 (IWB) has garnered roughly 15 percentage points more than the iShares S&P 100 (OEF).

The discrepancy in performance is easily explained; that is, the more smaller companies in your index, the better you have done over the last 5 years. For example, even though the 1000 companies in the Russell 1000 are large in market capitalization, they include 900 companies that are smaller than those in S&P 100. Similarly, there are 400 companies in the S&P 500 that are smaller than those in the S&P 100.

Yet today, there’s been a "changing of the guard." The larger the companies in your index, the better performance you are likely to see. That’s why I am giving more weight in my portfolios to the iShares S&P 100 (OEF). It may not be the winner for the next 5 years, but history is on the side of change.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.