New index tracks giants
NEW YORK — A new index from the Russell Investment Group aims to help you track Wall Street’s 800-pound gorillas.
The Russell Top 50 follows the performance of the 50 largest U.S. public companies, such as General Electric Co. and Exxon Mobil Corp. Cumulatively, they represent about 40 percent of the domestic equity market’s total capitalization. Small investors can get a slice of this mega-cap pie through a new exchange-traded fund to be launched next Monday by Rydex Investments. It will trade on the American Stock Exchange under the ticker symbol XLG.
At a time when many analysts are predicting the start of a fresh era of large-cap outperformance, the introduction of a new mega-cap index should be appealing to investors, particularly amid a sharp drop in small-cap stocks after five years of strong returns.
“In the macro-economic cycle we’re in now, with interest rates rising, the economy is still moving along pretty well, cranking out 3 percent GDP growth,” said Steve Sachs, trading director at Rydex Investments in Rockville, Md. “But people are concerned about the effects of rising interest rates, rising inflation and the economy slowing down. We are getting into the later stages of the cycle, and that’s where large-caps perform best.”
Russell was motivated to create the index because managers of large-cap funds often take underweight positions in mega-caps as they seek to outperform the market, said Lori Richards, senior product manager for Russell Indexes. For small investors, an index that invests in the nation’s largest publicly traded companies could provide a good counterpoint to an actively managed large-cap fund.
“If you’re an active investor, you’re taking more risk and trying to beat the market. Active managers find stocks they like and a lot of times they equally weight them,” Richards said. “So if you’re a large-cap manager, and you’re equally weighting the stocks in your portfolio, you’re underweighting, by default, these bigger stocks, because they are a huge part of the market.”
Mega-cap stocks perform differently from the broader large-cap sector. For example, year-to-date, the Russell Top 50 is down 3.12 percent, while the Russell Top 200, which makes up 67 percent of the market, has lost 3.42 percent. Both of those have held up better than the Standard & Poor’s 500, however, which has fallen 4.19 percent since the year began. And all three provide a contrast to the 10.3 percent swoon of the small-cap Russell 2000, which underscores the relative strength of larger stocks.
In addition to rounding out more diversified portfolios, the new index could hold appeal for novice investors. All of the stocks it holds are household names, such as GE, which accounts for 7.5 percent of the index, and Exxon Mobil, a close second at 7.3 percent.
The nation’s largest companies are usually known for being well-established, having stable business models and great cash flow, said Sachs, of Rydex. Companies such as Microsoft and GE are the “textbook definition of cash cows,” he said, which helps them weather any part of the economic cycle. As an added bonus, he noted, the top 50 boast a collective yield of 2.6 percent.
“If you are one of those individuals who follows the Peter Lynch methodology, where you want to know the companies you’re investing in, this is it,” Sachs said, referring to the former Fidelity fund manager. “Just about everyone out there in the investing public would recognize these names. People are using these products every day.”