• 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.