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Financial Literacy

What Is a Large Cap ETF?

ETFs are some of the most popular investment products on the market today—among them, large cap ETFs. These funds track the performance of the largest publicly traded companies, giving investors low-risk exposure to market stalwarts. And, with a significant number of large cap ETFs to choose from, investors have their pick of strategy when it comes to how they interact with the market’s blue-chip darlings. 

The goal of large cap ETFs is to provide stability, while growing your investment at a rate that outpaces inflation. While large cap ETFs aren’t going to see the growth that mixed funds will, they’re exactly what many investors want from their long-term holdings: predictability. And, thanks to low expense ratios and fees, they’re the ultimate set-it-and-forget it investments. 

Here’s a closer look at large cap ETF, how they work and some of the benefits of investing in them vs. other types of ETFs.

Large cap ETFs

Large Cap ETF Definition

To understand the focus of a large cap ETF, investors first need to understand the concept of market capitalization. The assets tracked by a large cap fund will generally have an individual market capitalization of above $10 billion. Mega-cap companies also factor in—these are companies with an individual market cap that exceeds $200 billion.

For an ETF to be a “large cap” fund, the majority of its assets need to be large or mega cap stocks. Many ETFs allocate to 75% and higher, and 85% large cap allocation is a number you’ll often see when evaluating different ETFs. To see the specific breakdown of companies, check the fund’s allocation before investing. 

The Best by Performance

There are many, many large cap ETFs out there to choose from. Thankfully, they each have key differentiators that make them different. It’s best to think of an ETF like a basket of stocks. While each large cap ETF might contain a basket of large cap companies, the allocation differs across every ETF. Here are some examples of the best-performing ones:

Readers will notice that most of these ETFs track the S&P 500 as the underlying index. This makes sense, since the S&P 500 is a market capitalization weighted index encompassing the largest 500 companies in the market. Not every large cap ETF tracks the S&P 500 index; however, it’s a convenient benchmark for many funds with a large cap focus. 

ETFs Make Blue-Chip Stocks Accessible

While most investors can name the largest public companies, they’re not always able to invest in them. These companies tend to have share prices that are significantly higher due to their strong market cap. 

For example, Microsoft (Nasdaq: MSFT) trades for $300+ per share. Meanwhile, Netflix (Nasdaq: NFLX) trades at $640+ and Amazon (Nasdaq: AMZN) trades at a whopping $3,500 per share. Retail investors squirreling away a couple hundred dollars each month to invest may only be able to piecemeal shares when buying outright. 

ETFs give investors access to large and mega cap companies via a portfolio with an affordable share price. Instead of deciding between a few shares of the top public companies, investors can own shares of an ETF that tracks them all—and benefit from their success as a whole. 

Are These ETFs Profitable?

One of the biggest knocks on large cap ETFs is that large cap companies aren’t market-beating investments. In fact, they’re more representative of the average, since so much of major indices is tied to large and mega cap companies. For example, the 10 biggest stocks make up roughly a third of the S&P 500 index’s market value. If they are the average, it’s difficult to beat the average with them. 

That said, large cap ETFs can be profitable over time. Their relative stability means waiting for years to see market-beating returns. Moreover, some dividend-focused ETFs have the power to become significant contributors to a passive income portfolio. Some large cap growth and value funds also have market-beating potential. 

The primary function of these ETFs is to beat inflation and to return value to shareholders over a longer time horizon. They do this through low fees, steady price appreciation, reduced volatility and dividend payouts. They might only pace (or slightly outpace) the market, but they’ll blow past inflation rates to preserve and accumulate wealth. 

The Bottom Line on Large Cap ETFs

Like any investment product, a large cap ETF isn’t without risk. Large companies are subject to bloat and may plateau at times. Thankfully, the purpose of an ETF is to bring together stocks for an aggregate performance: one that trends up and to the right on a long enough timeline. 

For investors who want a relatively safe risk, there are large cap growth ETFs. For those seeking exposure to a portfolio of proven players, a general large cap fund is often best. Interested in creating passive income? Consider an ETF composed of dividend aristocrats—all of which happen to be large or mega cap companies. Whatever your investing strategy, if it involves the market’s largest companies, there’s an ETF to support it. 

ETFs can be a great way to diversify your portfolio. To start generating wealth for years to come, sign up for the Liberty Through Wealth e-letter below. Market expert, Alexander Green, has been helping guide rookie and seasoned investors towards the best investment opportunities he’s uncovered for more than a decade.

While they’re considered more of a defensive investment, remember that large cap stocks are still equities—they’ll appreciate and lose value like anything else. Keep this in mind as you prospect large cap ETFs that play to the strengths of your investment strategy.


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