• The U.S. Large Cap Blend asset class is the most common asset in U.S. investor’s portfolios
• This popular asset class has produce returns of 10.33% CAGR (compounded annual growth rate) since 1972
• The oldest ETF (SPY), and most popular in this category, was introduced in 1993
• There are over 100 ETFs available in the U.S. Large Cap Blend Morningstar category
• 25 of these ETFs have been available for 10 years or longer
U.S. Large Cap Blend vs U.S. Stock Market: January 1972 – February 2018
Source: Portfolio Visualizer
The U.S. Large Cap Blend asset class is the most widely used asset in most American investor’s portfolios. And there is a very good reason for this. Throughout modern history, this asset class has been able to average returns of around 10% through wars, recessions, disasters and all kinds of political and economic uncertainties. As seen in the chart above, this asset class has produced returns of 10.33% CAGR since 1972. Also, note that this asset class basically IS the U.S. Stock Market. There is obviously very little difference between the movements and the returns of the U.S Stock Market versus the U.S. Large Cap Blend asset class over extended periods of time. The main reason for this is that the companies that represent this asset class are huge, and when added together, they simply dwarf the rest of the U.S. equity market.
SPY: January 1994 – February 2018
Source: Portfolio Visualizer
The first ETF to be introduced was the SPDR® S&P 500® ETF (SPY). It is by far the largest and most widely traded ETF on the market. This ETF does exactly what it was designed to do and has walked in lockstep with the S&P 500 index since 1993, producing returns of 9.57% CAGR. In November 2017, Investopia had this to say about the SPY ETF: “AUM $247.6 billion, Average Volume 64.96 million shares. Launched in January 1993 by State Street Global Advisors, SPY was the very first U.S.-listed ETF, and its success was instrumental in jumpstarting a trillion-dollar industry. The Trust seeks to provide investment results that, before expenses, correspond to the price and yield of the S&P 500.” Because this fund tracks the S&P 500 index with precision and it is extremely popular, you may understand why I and many others utilize SPY as a primary benchmark when comparing other funds and other asset classes.
Because of the U.S. Large Cap Blend asset class popularity, there are now over 100 ETFs available in this category. Utilizing the ETF screener on the Morningstar website, I was able to find 25 ETFs in this category that have been on the market for 10 years or longer. I have compared all 25 of these ETFs against each other utilizing the back-testing tools at Portfolio Visualizer. Using this data, I have ranked them in order by best long-term performance in this table:
Source: Morningstar
Of the 25 ETFs listed, 4 of them were clear leaders with an average 10-year return of 10.22% CAGR versus SPY at 9.18%. These 4 ETFs all have very different indexes and tracking methodologies. FTCS focuses on companies with “Capital Strength”. JKD tracks an index of large cap companies compiled by Morningstar. PKW focuses on companies that have been buying back their own shares. And RSP simply tracks all the stocks in the S&P 500 but utilizes equal-weighting rather than cap-weighting. To get a deeper understanding of each of these top performing ETFs, let’s look at their fund objectives & characteristics and how they compared to the SPY ETF.
FTCS vs SPY: August 2006 – February 2018
Source: Portfolio Visualizer
FTCS: The First Trust Capital Strength ETF seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of an equity index called The Capital Strength Index™. From the stocks in the NASDAQ US Benchmark Index, the largest 500 companies with a minimum three-month average daily dollar trading volume of $5 million are selected. To be eligible for inclusion in the index, companies must have: 1.) at least $1 billion in cash or short-term investments. 2.) a long-term debt to market cap ratio less than 30%. 3.) a return on equity greater than 15%. Eligible companies are then ranked by a combined short-term (3-month) and long-term (1-year) realized volatility. The 50 companies with the lowest combined volatility score are selected for inclusion in the index. A maximum weight of 30% in any one Industry Classification Benchmark industry is allowed. If an industry has a weight greater than 30%, the highest-ranking security by volatility will be removed and replaced with the next eligible security from a different industry. This process is repeated until no industry has a weight greater than 30%. The index stocks are equally weighted initially and on each rebalancing effective date. The index is reconstituted and rebalanced on a quarterly basis.
JKD vs SPY: August 2004 – February 2018
Source: Portfolio Visualizer
JKD: The iShares Morningstar Large-Cap ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities. Exposure to large, established U.S. companies. Access to a specific segment of the domestic stock market. Use to seek long-term growth in your portfolio.
PKW vs SPY: January 2007 – February 2018
Source: Portfolio Visualizer
PKW: The PowerShares BuyBack Achievers™ Portfolio (Fund) is based on the NASDAQ US BuyBack Achievers™ Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers™. The NASDAQ US BuyBack Achievers Index is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The Fund and the Index are reconstituted annually in January and rebalanced quarterly in January, April, July and October.
RSP vs SPY: June 2003 – February 2018
Source: Portfolio Visualizer
RSP: The Guggenheim S&P 500® Equal Weight ETF seeks to replicate as closely as possible the performance of the S&P 500® Equal Weight Index, before fees and expenses, on a daily basis. Standard & Poor’s, in collaboration with Guggenheim Investments, created the S&P 500® Equal Weight Index in response to the market’s demand for an official equally weighted index with the same component stocks as the S&P 500®. In the S&P 500® Equal Weight Index, each of the stocks that make up the index are “equally weighted.” To maintain composition, the S&P 500® Equal Weight Index rebalances quarterly. Performance potential. Reduces bias toward the largest companies and provides broad exposure to achieve attractive risk-adjusted performance results. Balanced exposure. Provides unbiased, equal weight exposure to all stocks in the S&P 500® Index, which may result in a more balanced and diversified portfolio. Disciplined rebalancing. To maintain an equal weight focus, the fund systematically reallocates from outperforming to underperforming stocks and market segments, which may provide an opportunity to improve long-term performance.
Now, let’s look at how all 4 of the top performing funds compared with each other. FTCS vs JKD vs PKW vs RSP: January 2007 – February 2018
Source: Portfolio Visualizer
In conclusion, I think that an investor will do well to own any of the top 14 ETFs in this asset class. To assure the same returns of the S&P 500, investors will want to select SPY or any other ETF that tracks the market-cap weighted S&P 500 index. Those who are seeking a little more alpha from their U.S. Large Cap Blend holdings should consider the opportunities available in FTCS, JKD, PKW and RSP.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: I currently own shares of PKW. I intend to purchase shares of FTCS in the future. I am not a professional investment advisor. Please perform your own due diligence or seek advice from a Registered Investment Advisor before investing in any fund mentioned in this article.
Thanks for the detailed analysis. Just curious to know why VOO is not considered for this.
Hi Vijay. VOO did not make the list due to its’ inception date. VOO was started in November 2010. I only invest in and investigate funds that are 10 years old or older. VOO should be an exact mirror image of SPY or IVV. So if VOO were listed, it would probably be ranked 12, 13, 14 or 15.
Thank you for your comment.
Micah
Thanks for the Response.. Recently only I came to know about your blog. There are lot of information with detailed analysis. Would like to learn more from your blog.
Thank you Vijay. Micah.
Hi Micah,
This one is not related to this topic (since the old post is not having reply option). Interested to know the reason(s) why one should invest in Energy sector ETF. It seems they are the worst performers for last 10 Years. Diversification purpose?. If so, what would be the % .
Thanks in advance.
Regards,
Vijay
Hello Vijay.
That’s a great question.
You are correct in saying that the 10 year performance of the energy sector has lagged the US Stock Market considerably.
But, I like to look at sectors and asset classes back as far as data is available.
Currently, the XLE fund has outperformed the S&P 500 by 1.48% CAGR over the last 19 years. (S&P 500 +6.11% vs XLE +7.59% – January 1999 through February 2018)
For those who do not want to own too many funds, I would recommend a Total US Market fund such as VTI or ITOT.
You will get a large amount of diversification from these funds which do include energy companies.
I prefer to have many options available to me when accumulation assets.
I find it very difficult to buy discounted assets when only having a few funds to pick from.
Buying funds when they are discounted and trimming profits when those funds increase in price has given me many opportunities to arbitrage discounted funds vs funds that hitting new all-time highs.
You can read more about why I own so many funds right here: https://deepvalueetfaccumulator.com/blog/defining-stock-market-modes-depression-crash-bear-correction-dip-pause-hold/
You can also read more about why I own an energy ETF (XLE) right here: https://deepvalueetfaccumulator.com/blog/discovering-value-top-3-energy-etfs/ Additionally, you can use the same website I use to back test funds right here: https://www.portfoliovisualizer.com/backtest-portfolio
I hope I’ve answered your question sufficiently.
And thank you for the opportunity to explain my methodology.
Micah
Thanks a ton for the detailed explanation.
You’re very welcome. Micah
One more request. There is no ETFs for Basic Materials and Telecom Sector in your list. Is there any reasons or am i missing something.
There is a leveraged ETF (TQQQ) in your list. Is it be accumulated for long term holding or Is it just for trading purpose
Thanks in advance.
Hi Vijay.
I do invest in FXZ which is a materials ETF (it’s on the list).
I haven’t written an article on that sector yet.
I have considered investing in VOX but the long term performance of the older IYZ helped me decide not to go with a telecom fund.
I think you could do well with VOX though.
I do own RYU, a Utilities fund, which does have some telecom in it, but not much.
I will be looking into the telecoms again in the future.
I will also be researching water and/or miscellaneous sector funds as a group.
As for now I’ll be sticking with the 30 listed.
Thanks
Micah
Eagerly waiting for your write up for FXZ. Is there any site which will give the % Change from 52 week high and % change from 200 Day MA or you are calculating it daily manually.
Hi Vijay
I currently build my list at Morningstar.com (portfolio).
This is where I get the “% below 52 week high”.
I use to use yahoo finance which did give me both % below 52 week high and % below 200DMA, but they changed their website layout so it is now difficult to retrieve & transfer the data to my spreadsheet.
I would be most grateful if you find a website that incorporates and displays both in one page for me.
Thank you
Micah
Read the news that google and FB are moving to Communication sector from Tech. Thought of sharing with you.
https://finance.yahoo.com/news/vanguard-shifts-indexes-3-etfs-184750764.html
Just curious whether Telecom Sector will be added in your list.
Hi Vijay
I’ve seen a lot of info on this recently.
This will definitely have an affect on several of the ETFs that I follow.
I think it is prudent for me to reexamine the telecom sector for inclusion in the list.
Thank you for sharing.
MIcah
Hi Vijay
I forgot to mention QLD.
I do invest in the 2x leveraged QLD.
I put strict restrictions on myself with QLD because it is leveraged.
Leveraged funds are intended to be used as short term trading instruments.
So investors should proceed with caution with QLD.
I only allow myself to buy QLD when it’s at the top of my list AND it’s at least -20% below 52 week highs.
Although QLD is designed for trading, I do buy it as a long term holding when I do buy it.
I was ready to pull the trigger and buy some QLD next Monday but that would violate my personal -20% rule.
So instead, I have put in a buy order for the much less risky QQQ.
Thank you once again for your comments and questions.
Micah
Thanks, Please let me know while dealing 2X /3X leveraged, Is there any difference in Mode? For e.g. HOLD will be (0% to 4% for 2X & 0%% to 6% for 3X) instead of normal (0% to 2%) .
Hello Vijay
I only have one leveraged fund in my listing.
So, I have not taken the opportunity to change the mode methodology on this singular fund.
It would be prudent for any trader to employ the methodology that you recommend here when using leveraged products.
My list is a very simple excel spreadsheet, so I do not intend to change the formula for this fund.
I enjoyed writing about ETFs but I am not a registered investment advisor.
With that said, I do take the liberty of assuming that my readers understand the risks involved with leveraged funds.
Please make sure you do understand the risks involved in leveraged funds.
Thank you Vijay
Micah
Thanks once again. Is there a ETFs related to Bonds in your list. Would like to know your views Investing in Bond ETF. If you have already written an article, please share.
Hi Vijay
I did write a very short comment about dropping bonds from the list in this article:
https://deepvalueetfaccumulator.com/blog/2017-changes-deep-value-etf-accumulator/
I did not explain in detail why I no longer use bonds though.
Primarily, bonds just do not fit in what I am trying to accomplish.
My primary objective in my own personal portfolio is to accumulate many shares of ETFs, in as many asset classes as possible that have the potential of equaling or outperforming an S&P 500 index fund.
Bonds simply cannot achieve the returns of equities without significant downside risk, in my opinion.
I used a long term bond fund when I did have bonds in my portfolio and on my list.
While I did not lose money doing this, it was seriously impeding my overall returns.
I have learned through experience and simply reading about bonds, that I was using bonds incorrectly.
Bonds in a portfolio are there for the purposed of stability rather than growth.
I only had one type of bond fund and it was a long dated fund from Vanguard called BLV.
I still believe BLV is a good fund, but it doesn’t belong in a wealth accumulator’s portfolio, in my opinion.
I have been building my portfolio and the Deep Value ETF Accumuator website over the last several years.
During this building process I’ve learned a lot about myself as a investor and the world of finance in general.
I believe that bonds can serve an important purpose in some investor’s portfolios, but I have determined that while I am in the accumulation phase of investing, I will not be accumulating shares of bond funds.
There may come a time in the next 10 to 15 years that I may transition from accumuation to distribution.
At that time, I might develop another website and call it something like The Deep Value ETF Retirement Portfolio or something like that.
Only time will tell.
Thanks
Vijay