Mega-Cap vs. Micro-Cap ETFs (MGC, IWC, RRGB, AAPL)

In the battle between David and Goliath, we all know who came out victorious. When it comes to the stock market the mega-cap stocks play the role of Goliath and the micro-caps are David.

Investors view the mega-cap stocks as stable and less risky than the other asset classes. Micro-caps are considered risky and volatile; the lottery tickets of the investment world. The questions are whether the assumptions are correct and which asset class is better for your portfolio?

iShares Micro-Cap ETF (NYSE:IWC)

The ETF is made up of over 1350 stocks that come from a variety of sectors that include financials, health care, and technology. After gaining 36.5 percent this year, the ETF is trading at a new all-time high. Since the bottom in 2009 the ETF is up an astonishing 231 percent. One of the benefits investors achieve with IWC is diversification throughout the entire asset class. The largest holding, Red Robin Gourmet Burgers (NASDAQ:RRGB), only makes up 0.34 percent of the allocation, eliminating any stock-specific risk.

The statement that smaller capitalization stocks will be more volatile is proven to be a myth with IWC. The chart of IWC is evidence that it has not had the wild swings that some of its peers have. The largest pullback the ETF experienced this year was 5 percent during the month of August, lower than that of the S&P 500.

Vanguard Mega-Cap 300 Index ETF (NYSE:MGC)

Also hitting a new high is a group of the whos who in the U.S. stock market. The basket of 292 stocks is led by household names Apple (NASDAQ:AAPL) and Exxon Mobil Corp (NYSE:XOM). The median market cap of the stocks that make up MGC is $77.5 billion. Compare that with the $205 million median market cap for the stocks that make up IWC.

The top ten stocks make up approximately 20 percent of the ETF, which is acceptable and does not suggest it is overweight any one stock. Similar to IWC, the largest sectors are financials and technology.

From its low in 2009, the ETF has gained 157 percent and is up 24 percent in 2013. Both numbers are very impressive, but the pale in comparison to the returns that IWC has offered.

The answer the question about which ETF is better for an investors portfolio in the future is difficult to answer because both offer exposure to such unique portions of the market. Looking back at history and the current performance of the two ETFs, it appears a combination of the two in a portfolio would be the best option for the average investor.