The Bigger They Are… The Better the Rally?

Matthew Carr By Matthew Carr, Emerging Trends Strategist

Dividend Investing
the-bigger-they-are-the-better-the-rally

The bigger they are, the harder they fall.

The majority of the time that adage holds true. But what about in investing?

As a rule, the smaller a company is, the more volatile its shares will be. During great pullbacks or collapses, larger companies are not hit nearly as hard as their small cap and mid cap counterparts.

Conversely, size also tends to determine how quickly a company’s share price will rise. Larger companies are often the slowest movers while smaller ones leap in quick spurts.

So, it’s been interesting to see an unusual phenomenon the last couple of weeks: Giants have emerged from their slumber and are plodding higher. And the biggest of the biggest are outperforming the broader markets.

The Guggenheim Russell Top 50 Mega Cap ETF (NYSE: XLG) has outperformed the roaring tech stocks of the Nasdaq during the past month, leaving the small caps of the Russell 2000 as well as the blue chips of the Dow Jones Industrials and S&P 500 in the dust.

It’s now at an all-time high, gaining about 5% since July 8.

XLG vs. DJI, S+P 500, Russell 2000 and Nasdaq, One-Month Return

The ETF represents the bluest bloodlines of the blue chip universe. Its top 10 holdings include the market pillars Apple Inc. (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), Exxon Mobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ), General Electric (NYSE: GE), Wells Fargo (NYSE: WFC), Berkshire Hathaway (NYSE: BRK-B), JPMorgan Chase (NYSE: JPM), Procter & Gamble (NYSE: PG) and Pfizer (NYSE: PFE).

That right there is the template for a conservative long-term portfolio. There are plenty of dividends, though nothing with an exceptionally high yield. And none of those companies are likely to simply vanish overnight.

Year-to-date, the return of the Mega Cap ETF is behind that of the faster-paced Nasdaq and Russell 2000, but the 4.4% return is more than three times that of the Dow Jones Industrial Average and well ahead of the S&P 500’s 3% gain.

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What’s interesting is that the Dow, after finishing June with a total buckling at the knees, hit its lowest points on July 7 and 8. That’s when the Greece debt standoff was approaching a full-blown crisis and the Chinese markets were trying to keep their meltdown from going any further.

These situations caused the consumer sentiment index to dip in July even though Americans reported income gains.

But just as big purchases seem to be on the docket for consumers, it appears as though investors saw an opportunity in mega caps…

XLG vs. Russell 2000, Year to Date

When we compare the mega caps versus the small caps of the Russell, the gains are comparable year-to-date (4.4% versus 5.2%) but without as much gut-wrenching volatility.

On top of that, the mega caps are considerably outperforming the ProShares S&P 500 Dividend Aristocrats ETF (NYSE: NOBL), the Vanguard Dividend Appreciation ETF (NYSE: VIG) and the WisdomTree US Dividend Growth ETF (Nasdaq: DGRW).

XLG vs. NOBL, VIG and DGRW, Year to Date

And it offers a 2.1% dividend yield, better than the Dividend Aristocrats ETF and in line with the Vanguard ETF.

So, in times of uncertainty, when the markets are bleeding and when investors are looking for safety, the old adage of “the bigger they are, they harder they fall” isn’t necessarily applicable. The 50 largest companies in the markets are performing just as well as the Russell 2000’s small caps. And they may even offer a better value.

Good investing,

Matthew