Embrace These 2 Mega-Cap ETFs

With the S&P 500 knocking on the door of fresh all-time highs, late-comers to the party may be wondering where some of the market's strength has been coming from.

Skittish investors do not need to look far because some of the most familiar names from conservative sectors such as consumer staples and health care are helping drive this rally.

Those investors looking to be long equities while establishing a broad yet conservative stance can consider mega-caps, as S&P Capital IQ points out in a new research note.

"From a fundamental standpoint, S&P Capital IQ has a Buy or Strong Buy recommendation on 17 of the 30 largest companies in the S&P 500 Index," according to the research firm. "The smallest' of these 30 heavyweights had a market capitalization of over $90 billion. These companies also had a number of other favorable characteristics, in our view."

Among the individual names S&P likes are Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). The two Dow components are also the two largest U.S. oil companies. S&P Capital IQ has five-star ratings on both stocks. Exxon and Chevron are among the mega-caps with strong balance sheets S&P Capital IQ views as currently undervalued.

Also on that list is Microsoft (NASDAQ:MSFT). The world's largest software maker, also a Dow member, also earns a five-star rating from S&P. The research firm is also bullish on Dow components General Electric (NYSE:GE), International Business Machines (NYSE:IBM) and Johnson & Johnson (NYSE:JNJ), placing on four-star ratings on each stock.

"Investors could of course purchase shares of these recommended names and other stocks, but that could get pretty expensive rather quickly or limit the number of stocks they hold in their portfolio," said S&P. "A more diversified and low-cost way to play this theme, however, is through mega-cap focused ETFs."

That is a good point and one of the ETFs S&P recommends to gain exposure to mega-caps is the Vanguard Mega Cap 300 Index ETF (NYSE:MGC). Home to 286 stock, MGC has an expense ratio of just 0.12 percent, making it cheaper than 89 percent of comparable ETFs, according to Vanguard.

The ETF's top-10 holdings, which combined for 21.5 percent of assets as of the end of February, include Apple (NASDAQ:AAPL), Exxon, GE, IBM and Google (NASDAQ:GOOG). S&P Capital IQ rates the $805 million ETF Overweight.

S&P also has an Overweight rating on the $4 billion iShares S&P 100 Index Fund (NYSE:OEF). Although the two ETFs track different indexes, the top-10 holdings of each are comparable as OEF is also home to Apple, Exxon, GE and plenty of other names also found in MGC.

As its name implies, OEF tracks the S&P 100, though the ETF is currently home to 101 stocks.

Compared to the S&P 500 "OEF has greater exposure to Consumer Staples (13% vs. 11%), Energy (13% vs. 11%) and Information Technology (22% vs. 18%) and less exposure to Consumer Discretionary (10% vs. 12%) and Financials (14% vs. 16%)," according to S&P.

With an expense ratio of 0.2 percent, OEF has returned nearly six percent year-to-date. MGC is up 6.7 percent.

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